Master of Science Thesis Business Administration
Department: Chinese Economy and Business
Author: Kristian Vleugels - 295123
Coach: Dr. P. Reinmöller
Co Reader: Dr. M. Greeven
Industrial Dynamics and Co-Evolution
in a Planned Economy:
A Case Study of the
Chinese Automotive Industry
Abstract
Co-evolution is already a key concept in social science research. In the field of
management it is only starting to gain awareness, but has proven to be a
powerful tool in explaining the developments of industries, firms and
economies as a whole. Previous research has conceptualized and measured the
co-evolution process in Western capitalist economies. In contrast our goal is to
conceptualize and measure the co-evolution process in a planned economy. By
applying the co-evolution theory to a planned economy we try to identify
where traditional co-evolution theory does and does not explain developments
in planned economies. These exceptions will allow us to develop additional pre
conditions for co-evolution in planned economies. We ground our analysis on
the developments in the formal market governing institutions, industry and
technology. We use these dimensions to empirically analyze the developments
in the Chinese automotive industry to illustrate the additional pre-conditions
we deem necessary when applying co-evolution theory to planned economies.
Contents
Table of Figures ................................................................................................................................ 3
Acknowledgment ............................................................................................................................. 4
Chapter 1: Research Introduction.................................................................................................... 5
1.1 A description of the research topic........................................................................................ 5
1.2 Theories in use: the practitioners’ viewpoint ........................................................................ 7
Chapter 2: Literature Review ........................................................................................................... 8
2.1 Evolution ................................................................................................................................ 8
2.2 Industry Dynamics.................................................................................................................. 9
2.3 Co-evolution......................................................................................................................... 10
Chapter 3: Theory & Methods ....................................................................................................... 15
3.1 The proposition and its relevance ....................................................................................... 15
3.2 Co-evolution conceptually ................................................................................................... 16
3.3 The model ............................................................................................................................ 17
3.4 Research strategy................................................................................................................. 19
Chapter 4: The Case ....................................................................................................................... 21
4.1 Introduction to the Chinese automobile industry ............................................................... 21
4.2 Mapping the Case Study ...................................................................................................... 22
4.2.1 Pre Reform .................................................................................................................... 23
4.1.2 Post Reform .................................................................................................................. 27
4.1.3 The Last Era ................................................................................................................... 32
Chapter 5: Analyses ....................................................................................................................... 40
5.1 Analyses Pre Reform Causality............................................................................................. 42
5.2 Analysis Post Reform Causality ............................................................................................ 43
5.3 Analysis causality Last Era .................................................................................................... 45
5.4 Fine-grained environmental Analysis .................................................................................. 48
5.5 Co-evolutionary Analysis...................................................................................................... 53
Chapter 6: Discussion..................................................................................................................... 56
Chapter 7: Conclusion .................................................................................................................... 63
7.1 Theoretical Implications....................................................................................................... 63
7.2 Practical implications ........................................................................................................... 65
7.3 Limitations and suggestions for further research ................................................................ 66
Appendix I - A Historical overview of the Chinese Automotive Industry....................................... 67
Appendix II – Overview cars produced in China ............................................................................ 67
Appendix III - Graphical Development of the Dimensions ............................................................. 67
Appendix IV– Analysis of pre conditions old and new ................................................................... 73
References ..................................................................................................................................... 74
2
Kristian Vleugels 295123
Thesis MSc ChEB
Table of Figures
Figure 1: The research topic broken down in steps ........................................................................ 6
Figure 2: Development of research questions in compliance with the relevant literature ............ 6
Figure 3: The proposition: a probalistic statement....................................................................... 15
Figure 4: The object and the domain ............................................................................................ 15
Figure 5 Causalities in the Chinese automotive industry .............................................................. 18
Figure 6 The case study in steps ................................................................................................... 19
Figure 7: Pre reform overview ..................................................................................................... 23
Figure 8: Post reform overview..................................................................................................... 27
Figure 9: The last era overview 1/2 .............................................................................................. 32
Figure 10: The last era overview 2/2 ............................................................................................ 33
Figure 11: Co-evolution causalities ............................................................................................... 41
Figure 12: Variable overview ........................................................................................................ 48
Figure 13: Correlation between the dimension’s variables and cars produced ........................... 49
Figure 14: Co-evolution analysis visualized .................................................................................. 55
Figure 15: Preconditions related to co-evolution theory in planned economies ......................... 64
3
Kristian Vleugels 295123
Thesis MSc ChEB
Acknowledgment
I am heartily thankful to my supervisor, Professor Dr. Patrick Reinmöller, whose encouragement,
guidance and support from the initial to the final level enabled me to develop an understanding of the
subject. Besides this the support and insights created by Dr. Mark Greeven have been crucial for the
completion of this thesis.
Without the interviews of many dedicated professionals this thesis would not have reached the
dept it has, therefore I would like to thank Dr. Buhui Qui, Mr. Frank Zhao, Dr. Grit Walther and Mr.
Christian Schroeter.
A special word of thanks goes out to Dr. Yiongjian Ren, who has helped me on many occasion
during my stay in China and supported me with his network and resources that founded the origin of
this research.
Lastly, I offer my regards to all of those who supported me in any respect during the completion
of the project.
Kristian Willem Vleugels
4
Kristian Vleugels 295123
Thesis MSc ChEB
Chapter 1: Research Introduction
1.1 A description of the research topic
China overtook the US in sales terms to become the world's largest vehicle market in the world
according to the Japan Times. The Chinese Association of Automobile Manufacturers reported record
results since China’s sales outperformed those of the US with more than 20%. Additionally, an increase
in sales for June 2009 to 1.14mln units secured the industry's fourth consecutive month of over 1.1mln
units sold. Since becoming a net exporter of vehicles in 2005, China's exports have risen; increasing 79%
in 2007 to 612,700 units and the Government’s target to top 1mln units in 2010 has been achieved.
These numbers become even more astonishing if we consider that the first automobile
produced for private use in China was in the late 1970’s (Gallanger, 2006). This interesting case study
provides the back bone of this research as it will be used to find exceptions to the existing coevolutionary theory when applied to planned economies. This theory will allow us to create a better
understanding of the Chinese automobile industry and to add to the need for an increase in empirical
research within co-evolutionary inquiry systems (Lewin, Volberda, 1999).
First we need to understand how we use the term co-evolution in the context of this research.
We define co-evolution in accordance to Murmann’s (2003, pp210) research as “Two evolving
populations co-evolve if and only if they both have a significant causal impact on each other’s ability to
persist”. To understand why China’s automobile industry was able to capture a dominant market
position, it is necessary to examine the causal link between the automobile industry in China,
technology, and the formal market governing institutions, three populations crucial for each industry
development.
Co evolutionary analysis is based on the changes over time that are self reinforcing and will lead
to a change of the industry dynamics (Murmann, 2003). In order to find the relations that caused the
changes in industrial dynamics in China we need to investigate the causal processes that link the
industry with formal market governing institutions and the developments in technology.
5
Kristian Vleugels 295123
Thesis MSc ChEB
Co-Evolution
R&D
Institutions
Sector
Research Driver
• The co-evolution between relevant variables
• Technological innovation
• Formal market governing instutions
• Automotive industry
• Generalization & Creating understanding
Figure 1: The research topic broken down in steps
To find the exceptions of the co-evolution theory in planned economies and to judge the ability
of co-evolutionary theory to explain the industry dynamics in the Chinese automotive industry we will
establish a proposition. But before we can do this we establish a literature review after asking ourselves
the following questions in figure, 2 which address the process from evolution to co-evolution.
What is industrial
evolution?
How does it
influence
industry
dynamics ?
What is industrial
co-evolution?
What are the
properties and
requirements for
co-evolution
research
Figure 2: Development of research questions in compliance with the relevant literature
This thesis is organized as followed; we will start by looking what the existing theories in use are,
about the topic. Then we will construct a literature review according to the 4 questions that we just
stated. This literature review will help us to establish a clear overview of the existing academic literature
surrounding this topic. Before we can tackle the puzzle of the Chinese automotive industry I will equip
the reader with sufficient knowledge about the Chinese automobile industry. Subsequently we will map
the causalities that are present in the Chinese automotive industry. Hereafter we will analyze these
causalities and determine if they do or do not indicate that co-evolutionary theory can be applied to
planned economies. Then we will discuss the conditions that we need to establish in order to apply coevolutionary theory to planned economies. We will end up with a conclusion considering the theoretical
and practical implications and suggest topics for further research.
6
Kristian Vleugels 295123
Thesis MSc ChEB
1.2 Theories in use: the practitioners’ viewpoint
The common consensus in economic theory is that the competitive advantage of a firm is
established outside its boundaries (Murmann, 2003). This means that the competitive advantage of
firms is either located at the industry or country level. In theoretical economics a firm has a competitive
advantage when it is located in an industry or country that has certain specific advantages or a better
structure. When looking at firm competitive advantage through this perspective you usually end up
attributing it to national variables as climate, natural resources, capital labor-ratios, relative prices of the
factors of production or at industry structure variables like concentration ratios, entry barriers, and so
on (Murmann, 2003).
The consensus in economic theoretical literature is that the availability of skilled labor is the
reason why one country has a competitive advantage over another. But what it lacks is the insight that
strong national industries are supported by institutions and highly specialized supporting industries
(Porter 1990; Nelson, 1996). The common theories also do not account for changes over time including
recent developments in strategic trade theory and their effect on the competitive advantage according
to Krugman (1991). They tend to focus more on the differences in industrial leadership at one particular
point in time. The big difference in co-evolution theory is that it specifically highlights the changes over
time and sees them as a key driver for the creation of competitive advantage of an industry in a
particular country.
Besides co-evolution theory there are several sociologist theories like organizational ecology
that also determines the environment as the route of competitive advantage. In contrast to early
research done for example by Hannan and Freeman (1977) firms are actively involved in creating their
own selection environment, over time, allowing them to adapt their features in order to become better
equipped for global competition.
7
Kristian Vleugels 295123
Thesis MSc ChEB
Chapter 2: Literature Review
In this chapter a literature review will be provided. The literature review discusses previously
published literature that can assist in creating a better understanding of how co-evolution theory can
help to understand changing industry dynamics. The topic of co-evolution has not been researched to a
great extent but provides us with a good amount of relevant, and very interesting, literature to review.
2.1 Evolution
There are three specific challenges according to Murmann (2003) when looking at the
evolutionary models. Those challenges are to indentify how variants are introduced, which variants to
leave out because they do not fulfill the selection criteria and how certain variants are kept over a long
period of time and are adjusted to fit changing criteria. Necessities when studying industrial change as
well as when studying technical change is to clearly specify the level of analysis. When correctly
indentified the researcher specifies the level of analysis that is directly below and above the focus of
their investigation (Murmann and Tushman, 2001).
There are two important reasons why evolutionary theories have been developed. Firstly in
order to explain the influence of agent’s actions on organizational structures and not necessarily the
agent’s intentions. Secondly in order to reiterate the basic reasoning of how human beings behave and
make decisions. Therefore the literature assumes that evolutionary research does not focus on the
intentions but on the consequences.
Scholars have reached consensus that technological change plays an important role in industrial
dynamics and economic growth (Usher, 1954; Landes 1969; Rosenberg 1982). The main body of this
research has accepted that that technological innovations are not only able to create new products and
industries but also can completely destroy the fortunes of existing firms or even eradicate entire
industries altogether (Schumpeter, 1934; Gort and Klepper, 1982; Nelson and Winter, 1982; Tushman
and Anderson, 1986; Anderson and Tushman, 1990). Most historical researchers have reasoned that the
development of technology should be seen as an evolutionary process (Basalla, 1998; Vincenti, 1990;
Petroski, 1992; Ziman, 2000).
When we look at institutions we can see that literature defines them either in terms of
consequent patterns of actions or in terms of continuing patterns of ideas and values. In the context of
this research institutions focuses on the formal actions, rules, and practices that are combined in the
8
Kristian Vleugels 295123
Thesis MSc ChEB
market governing institutions of China’s one party political system. We specifically not focus on the
informal institutions that consist of social aggregates. Institutions are important in social science
research since they differ in how efficiently they coordinate human efforts to a particular purpose.
Therefore institutions have a profound influence on the performance of a particular institution or
economy (North, 1990 Nelson and Sampat, 2001). If the evolution of the government regulated
economy is causally linked to the evolution of the Chinese automobile industry, it is proper to speak
about a co-evolutionary process in line with Murmann’s (2003) research.
2.2 Industry Dynamics
Levinthal and Myatt (1994) look at industry dynamics by studying the activities and capabilities
of firms at a macroevolution level in the mutual fund industry, in order to determine the effects of coevolution. Their study includes an analysis at both the industry level and firm level. They look whether
they can find evidence of relations in the replication of routines, capabilities and competences but also
whether there is evidence of relations between the competition and selection.
At a firm level analysis co-evolutionary views can also indicate capabilities of firms and levels of
competition according to Huygens, (1999). Support for dynamic interactions between firms has been
proved in a research on evolution among Illinois banks by Barnett and Hansen (1996). They found that
there is a relation between firm learning and adaption on the one hand and higher levels of competition
and selection on the other. In earlier research similar effects had been called the “arms race” or “the
Red Queen Effect” (Beinhocker 1997, Kauffman 1995, Van Valen 1973) after the comment to Alice, “It
takes all the running you can do to keep in the same place” (Carroll 1946).
In more recent research on industry dynamics the concept of hyper competition is introduced
by D’Aveni and Gunther (1994). Their reasoning is in line with the “Red Queen Effect” as they argue that
increasing competition results in short periods of advantages and is subsequently followed by
disruptions, a reasoning that is supported in later research by Illinitch et al. (1998).
These co-evolutionary models are all based on the reasoning that adaption and selection will
eventually cancel each other out. This means that the searching behavior of firms for new capabilities
will result in their competitive position but due to a simultaneous increase in competitive dynamics,
these advantages are quickly outpaced. The main consensus on industry dynamics is that all species
keep changing in a never-ending race only to sustain their existing level of fitness (Murmann, 2003).
9
Kristian Vleugels 295123
Thesis MSc ChEB
2.3 Co-evolution
In organization science co-evolutionary theory is not a new concept. Co-evolution has actually
been part of the early work on the development of bureaucracy.
According to Weber (1978) the establishment of the bureaucratic form of the firm is actually a
response on the changing industry dynamics during the industrial revolution.
Chandler (1962) has a similar observation of a co-evolution event. He noticed that the M-Form1
of organizations co-evolved in response to the changes in the transportation and communication
industries. This development allowed them to become more flexible and to expand their business
interests.
Weick (1979) observed a change in the organizing within organizations. Members within the
organization where starting to create their own rules and socially established their own environment.
Weick therefore sees the environment simultaneously as endogenous and exogenous.
Kieser (1989) noticed that the medieval guilds where replaced by mercantilist due to the coevolution of institutions and markets. As a result of the co-evolution process the functionality of
institutions increased, the social monopolies disappeared and there was even a decoupling of personal
motives and organizational goals.
Aldrich (1979) theorizes an evolutionary event based on methods of selection, variation, and
retention. Nelson and Winter (1982) and Levitt and March (1988) found a co-evolutionary development
in the learning frameworks that improved learning and enhanced routines.
Besides these observations there are much broader co-evolutionary systems. Levinthal (1997)
for example compares the impact of firm adaption and population selection in a changing environment.
He does this by simulating the firm’s adaption to smooth and rugged fitness landscapes.
A further broadening of the co-evolutionary systems is based on the research of Heylighen and
Campbell’s (1995) competitive configurations, by Baum (1999, p. 120) where he shows several
alternatives to zero-sum, purely competitive co-evolutionary systems that are very competitive
“increase in a firm’s fitness results in a decrease in rival firms’ fitness”; partly competitive “some
1
The M-form (multi-divisional form) organization is defined as one that consists of “self-contained units” where
complementary tasks are grouped together.
10
Kristian Vleugels 295123
Thesis MSc ChEB
resources are shared and others not”; synergistic “an increase in one firm’s fitness results in an increase
in rival firms’ fitness”; and independent “an increase in one firm’s fitness does not affect rival firms’
fitness”. Also the research done by Burgelman (1994, 1996) adds to broadening of the co-evolutionary
systems. His intra organizational-process model shifts the focus of selection from the firm level to
groups of strategic actions inside the firm. His model also indicates that managing intra organizational
ecological processes can help firms to improve the both the internal learning and external learning.
In research done by Murmann (2003) co-evolution is the combined outcome of,
environmental/industrial, institutional and technological effects. In his reasoning co-evolution can
happen in all interacting populations of organizations. His theorizing explains that change can both form
internal direct actions but also external from feedback of the rest of the system. We can interpret from
this that; change can be self-enforcing and does not need to be an outcome of either managerial
adaptation or environmental selection but is rather the joint outcome of institutional and environmental
effects.
2.4 Properties & Requirements
Co-evolution theory is gaining awareness, but it still has a long way to go before becoming a
mainstream theory. In this section we consider some of the essential properties of co-evolution and
their implications
The first property of co-evolutionary theory is defined by McKelvey (1997, p. 360) he proposes
that co-evolution takes place at multiple levels, meaning that interactions happen within firms but also
between firms. McKelvey classifies the interactions within firms as micro co-evolution and the
interaction between firms and their environment as macro co-evolution. His reasoning is based on the
perception that the evolutionary process of variation, selection and retention operates both within the
firms and at the population level. Macro co-evolution focuses on firms that operate in a co-evolutionary
competitive environment, whereas micro co-evolution focuses on the intra firm competitive context
including the development of intra-firm resources, dynamic capabilities and competencies. A clear
example of this type of analyses is provided by Pettigrew (1995), where he distincts between the
internal context which involves capabilities, resources, culture and internal politics and the external
context which involves political, economic and social forces. Another co-evolutionary research that
includes multiple levels of research is performed by Baum and Singh (1994) who focus on co-evolution
at community, organization, population, and intra-organization level.
11
Kristian Vleugels 295123
Thesis MSc ChEB
When considering a multiple level co-evolutionary analysis you should also take into account the
interactions that happen at multiple levels within the co-evolution process. These relations have been
observed by both McKelvey (1997) as well as Baum and Singh (1994) and they found that it is mainly a
vertical relation where lower levels of co-evolution are influenced by higher levels of co-evolution.
McKelvey 1997 explains it as follows “micro co-evolutionary order within firms originates in the context
of macro co-evolutionary selections competitive pressure” which is completely in line with research
done by Cohen and Stewart (1994). According to leading co-evolutionary theory researchers there are
not many studies that follow this essential principle of co-evolution (Tushman and Rosenkopf 1996;
Garud and Van de Ven 1992). One of the interesting researches that also includes the multiple levels
principle is from March (1991) his study of interaction during environmental turbulence focuses on the
microstate level in which he looks at changes in individual believes and at the firm level where he
focuses at changes in organizational code.
A wider background in multilevel co-evolution can be found in the Variations in Organization
Science by Baum and McKelvey from 1999 (Ingram and Roberts 1999; Rosenkopf and Nerkar 1999; Van
de Ven and Grazman 1999).
The second property indentified in the literature is the path- or history dependence of coevolutionary research. This property is based on research by Calori et al. (1997), Kieser (1989) and
McKelvey (1997) who all reason that adaptation in a co-evolutionary process is path or history
dependent. Path- or history dependence is introduced in early research by Stinchcombe in 1965 and
later by Levinthal in 1997, they both argue that the fact that firms may have adapted differently over
time is a result of a lack of uniformity between firms in an earlier point in time. This reasoning breaks
with traditional population ecology theories that attribute the changes to a set of particular external
conditions.
The third property of co-evolution reasons that there is no path dependence in co-evolutionary
theory. Firms do not only evolve they also co-evolve in line with their peers and with changes in their
organizational environment according to Baum (1999), Kauffman (1993) and McKelvey (1997). Change is
driven by feedback from the rest of the system and due to interaction amongst peers; therefore changes
occur in all populations within an organization as long as they interact. Baum and Sigh also take this
principle into account in their 1994 research where they look at both diffuse co-evolution where one or
a couple of variables are influenced by multiple of other variables, and direct co-evolution where one
variable influences one other. When looking as such complex interactions between variables the,
12
Kristian Vleugels 295123
Thesis MSc ChEB
dependent-independent variable distinctions is less meaningful. Because the interactions are not one
sided changes in one variable might also be explained by changes in another variable therefore we can
say that there is no path dependence in co-evolution.
The fourth property discusses that besides no path dependence the literature also indentifies
there is nonlinear feedback in co-evolution. Due to indeterminate feedback paths the changes in one
variable can result in unexpected changes in other variables. The changes in one variable often even
contradict the simple cause-effect logic between dependent and independent variable due to the higher
order feedback process in co-evolutionary interactions according to Baum and Singh (1994) and Casti
(1994). Because of these contradictions the literature assumes that there is a nonlinear feedback
between interactions in co-evolutionary research. The fact is that relations in co-evolutionary theory can
make it very difficult to understand. Anderson (1999) even indentified situations where scholars in
strategy an organization research took out the non linear interaction for the sake of simplicity.
The fifth and last property relates to recursive bidirectionality based on research by Volberda
(1999). He reasons that that indirect responses that exist outside the direct interactions between groups
and organizations, play an important role. Based on this research, co-evolutionary theory should focus
specifically on the interaction between organizations and their environments. This can also be
interpreted as firms influencing their organizational environment development, and the organizational
environment that actually exists of other firms, also influences firm development. Volberda explains it in
his 1999 research as “Multi directional causalities results in interdependencies and circular causality;
each firm influencing the other and in turn being influenced by the behavior of the other”. Due to the
two directions in which we can view cause and effect relationships the literature argues that the mutual
causalities are recursive bidirectional.
Besides five important properties there are also several requirements for co-evolution research
stated in the literature. These requirements indicate what there needs to be done in order to improve
the existing base of literature. As the literature covers all topics in co-evolution research we must take
into account that not all of these requirements apply to every co-evolutionary research.
According to Volerda (1999) co-evolution research can be the bridge between research in
strategy and organization studies. It is also especially fit for reinterpreting, reframing ad redirecting the
selection adaption discourse. A key requirement for research to realize this potential will be new
research applying and justifying the co-evolution model and increasing the amount of empirical research
13
Kristian Vleugels 295123
Thesis MSc ChEB
within the field of co-evolutionary research. More and more fields of research are seeing the potential
for co-evolution to create a better understanding of their subject like, emergence (Holland 1999),
complexity science (Anderson et al. 1999), population ecology and computational organization theory
(Carley 1995). Especially due to the fast development of new analytical models empirical research lacks
behind. There is a consensus among researchers that empirical co-evolution needs longitudinal methods
of analysis and time series data. (Miller and Friesen 1982, Huber and Van de Ven 1995, Henderson and
Mitchell 1997, Barnett and Burgelman 1996), however according to the same scholars there is still room
for improvement and new research in this field.
The new empirical data should especially focus on new type series data consisting of micro state
adaption according to McKelvey (1997). Good micro state research adapts the research questions used
to the particular co-evolutionary system it is studying. There are various examples in the literature that
focus on co-evolutionary research that include product changes and new product introductions
(Sanderson and Uzumeri 1997), strategic adaptations such as mergers, acquisitions, divestitures,
greenfield investments, (Webb and Pettigrew, 1999; Lewin and Weigelt 1999), strategic partnerships
and alliances (Lawless et al. 1999), changes in organization design (Hunter 1999, Utikal et al. 1999, Obel
et al. 1999) and IT implementation events (Hunter 1998, Hanaoka and Sakano 1999). All these examples
boil down to the requirements needed for solid co-evolution research. It should be a combination of
micro adaptions with other events in history, like regulatory changes, technological changes and
changes demographics combined with performance time series and with founding conditions.
A large amount of scholars in co-evolution research have agreed that new insights can be
created about adaptive behavior of over- and underperforming populations and individual behavior in
organizations by using organization and determining the primary structure of strategic data. Amongst
these scholars where Hunter (1999), Lewin and Weigelt (1999) Van den Bosch et al. (1999), Baden-Fuller
et al. (1999) and Webb and Pettigrew (1999). This data sequencing according to Mckelvey (1997) boils
down to mapping the rates of change in variables under research and apply a certain level of importance
to these changes. When doing this the researcher can distinct between the adaption that is dependent
and independent of firm environment. When doing so McKelvey (1997) is convinced that there will be
new relevant literature created that help to increase the empirical research base.
14
Kristian Vleugels 295123
Thesis MSc ChEB
Chapter 3: Theory & Methods
3.1 The proposition and its relevance
According to the established literature review we can learn that co-evolutionary models help to
better understand the dynamics of industrial change (Kauffman, 1995; Lewin et al, 1999; Nelson 1995
Ziman, 1999). This study analyzes the co-evolution of national firm population, technology and national
institutions. After having created a better understanding through the interpretation of the literature in
the literature review we developed a proposition that expresses a probabilistic relation between CoEvolution and Industry dynamics of the Chinese Automobile industry.
Proposition
• Co evolution as stated by Murmann (2003) between formal institutions and innovation of
technology can explain the change in dynamics of the Chinese automobile industry
Figure 3: The proposition: a probalistic statement according to the methodology of Hak & Dul (2007)
Object of analysis
Domain: Unit of Analysis
Domain: Time Horizon
Domain: Spatial Dimensions
• Co Evolution theory -> Change in industry dynamics
• The Chinese automobile industry
• Pre reform 1931 - 2010
• Domestic -Mainland China
Figure 4: The object and the domain based on the methodology of Hak & Dul (2007)
The relevance of this proposition for academic use is twofold. It will add to the academic
literature and to the understanding of the industry. According to Murmann (2003) to explain a change in
a particular phenomenon as a co-evolutionary process, it is necessary to indentify in detail how two or
15
Kristian Vleugels 295123
Thesis MSc ChEB
more populations are causally linked to produce the observed outcome. The Chief aim of this research is
to indentify robust causal processes that explain how social outcomes are produced from a given set of
social conditions as explained by Tilly (1998). The methodology of co-evolutionary theory has often been
discussed in academic papers. However, studies of simultaneous evolution or co-evolution of
organizations and their environments are still rare (Lewin, Volberda; 1999). This proposal will therefore
also help to confirm and widen the generalizability of those few academic findings that already have
been published. Furthermore it will lead to a better understanding of one of the signature industries of
the Chinese economy; the automobile industry. By better understanding the evolution of this pillar
industry we create a better insight and understanding of industrial development in China in general.
3.2 Co-evolution conceptually
In applying co-evolution theory to the Chinese automotive industry we analyze the industry
according to the following preconditions based on the traditional view of co-evolution theory (Lewin et
al, 1999):
•
We study the industry adaptations over a long period of time (McKelvey 1997, Levinthal 1997)
by using longitudinal time series of microstate adaptation events and measure a rate of
change or pace of change;
•
We examine the industry adaptation within a historical context of the industry and its
environment (Calori et al. 1997, Kieser 1989, Stinchcombe 1965);
•
We consider multidirectional causalities between micro- and macro co-evolution (McKelvey
1997), as well as between and across other system elements (Baum 1999). In such systems of
relationships among variables, the dependent-independent variable distinction becomes less
meaningful. Changes in any one variable are caused endogenously by changes in the other;
•
We look for mutual, simultaneous, lagged, and nested effects. Such effects are not very likely
to be linear, and as a consequence of feedback flows, changes in one variable can produce
counterintuitive changes in another variable;
•
We consider that co-evolution is not path dependent, which enables and restricts adaptation
at the firm level and at the population level, thereby driving both retention and variation at
different rates;
•
We also take into account economic, social, and political macro variables that may change
over time and influence the deep structure within which micro- and macroevolution operate.
16
Kristian Vleugels 295123
Thesis MSc ChEB
•
We incorporate changes occurring at the level of different institutional systems within which
firms and industries are embedded. Changes in the regulatory environment affect the firm and
the industry, but the firm and/or the industry may have also influenced these changes;
3.3 The model
The theoretical framework that is used in this research is defined by Murmann (2003) as “Two
populations co-evolve if and only if they both have a significant causal impact on each other ability to
persist”. “Such causal influence can proceed through two avenues: (1) by altering the selection criteria
or (2) by changing the explicative capacity of individuals in the population without necessarily altering
the selection criteria”.
To clarify this theory further we look at Kaufmann’s (1993) idea of coupled fitness landscapes
that expresses the same concept of co-evolution. In Kaufmann’s research he specifies that co-evolution
occurs due to the changing of the fitness landscape of one firm by the other. This interaction can have
various outcomes, it can improve the average fitness of both populations or it can deteriorate it, but it
can also improve or deteriorate the fitness landscape of one of the populations but not the others.
Whether the co-evolutionary process is going to improve the firms involved depends specifically
on the relationship that connects the two parties so this should clearly be specified in the analysis.
What is central about a co-evolutionary process is the bidirectional causality linking the two
parties in the relationship. To understand why the Chinese Automobile industry was able to capture a
dominant market position, we must look at the causal links between the national population of
industrial firms and the national population of market governing institutions.
Co-evolutionary dynamics are the result of small differences over time that reinforce themselves
and cause the dynamics to occur. The difficulty of indentifying co-evolutionary dynamics is to find and
display all the causal processes that connect two partners in a co-evolutionary relationship. To claim for
example that technology co-evolves with national firm populations, we establish a precise map in order
to see when and why this relation occurs.
To add to the theory as stated by Murmann (2003) and Kaufmann(1993) Arthur Stinchcombe
(2000) proposes that we need to examine the physiology of the evolving social system to form a proper
evolutionary analysis. By the extension a co-evolutionary analysis should examine the physiology that
links two or more evolving systems in the case of the automobile industry we need to investigate the
flows that link the firms with market governing institutions. I will argue for example that the forced joint
17
Kristian Vleugels 295123
Thesis MSc ChEB
ventures in the automotive industry will be one such important flow that allowed the social and
environmental influence to take place.
To explain co-evolution of the automotive industry and the market governing institutions I
indentify the formal market governing institutions, and the innovation of technology as the more
specific causal mechanism that connected the evolution of each population. Informal institutions are not
included because they add to a lesser extend to industry co-evolution according to (Murmann, 2003),
furthermore they are very hard to quantify and asses to which extend they do influence development2.
Technology
Chinese
Automotive
iIndustry
Formal
institutions
Figure 5: Causalities in the Chinese automotive industry
Whether a co-evolutionary process is beneficial or harmful for the parties involved depends on
the particular causal relationship that links them and, therefore, that relationship will be specified in the
analysis part.
2
In this research we will use formal institutions and institutions interchangeably both indicating the
formal market governing institutions in China
18
Kristian Vleugels 295123
Thesis MSc ChEB
3.4 Research strategy
We considered the various possibilities that we have to answer the research question. We also
judged the feasibility for the different research strategies before we selected the most appropriate one:
an in depth case study, in which the proposition can be reviewed and theory will be developed. We
will approach this by looking at historical evidence for co-evolution in China’s automotive industry. By
analyzing these events we try to find counterintuitive observations from which we will build new theory.
The goal is to find out in what way co-evolution theory is applicable to China in order to justify the
model and to clarify the developments of the Chinese automotive industry.
We used China’s automotive industry due to its relevance in China’s economy. The industry is
seen as a pillar of China’s economy and therefore provides a good base for generalization among other
manufacturing industries. Furthermore we chose the automotive industry in China because of the
recent developments in the market which makes this industry a really hot topic, like becoming the world
leader in manufacturing in 2010 but also the developments surrounding the new energy vehicles.
We are focusing in depth on a specific market in China, on a unquantifiable topic, e.g. coevolution, which cannot clearly be indicated by findings in tables, charts numbers and calculations, and
as previously mentioned this topic has not been covered in research and is therefore inappropriate to
perform solely through a desk research. Therefore we opted for a historical framework and case based
on literature research supported by interviews with industry experts in order to get an in-depth view on
the developments of the industry. Interviews have therefore been conducted with professionals from
Ford, Daimler, Geely, the Erasmus and Wuppertal University.
By first mapping the case study we get a good view of how the industry, technology and
institutions evolved over the last 60 years in China. The evidence will be abstracted by analyzing the case
study. The theory building will go through the following steps.
Map the automotive industrial
development in China including
the causalities that are apparant
in the indutrial landscape
Determine which parts of
coevolutionary theory are
applicable to China's planned
economy
Compare and extent on the
literature findings by creating pre
conditions for the new theory
Figure 6: The case study in steps
In order to map the case of the Chinese automotive industry we scanned the Proquest database
for all published articles related to the automotive industry development in China chronologically from
now until the beginning of the industry. Subsequently we distilled all the information from these
19
Kristian Vleugels 295123
Thesis MSc ChEB
publications that were relevant to the industry, technology and the institutional development.
Afterward we analyzed whether there were causalities between these populations on a yearly basis.
Then we included this causality in the map and elaborated on it in the analysis part. This gave us a large
amount of causalities from which we could conclude if they were in line with traditional co-evolution
theory. For the theory building part we analyzed whether there were exceptions in the case study that
could not be explained by co-evolutionary theory. These exceptions were then transformed into
statements and we discussed with industry experts. The industry experts gave their view on these
statements increasing the validity of the observations. After this we used these observations to add
preconditions to the traditional co-evolution theory to get a better understanding of industry
development in planned economies.
20
Kristian Vleugels 295123
Thesis MSc ChEB
Chapter 4: The Case
Before attempting to solve the puzzle of the Chinese automobile industry, I will equip the reader
with sufficient knowledge about the Chinese automobile industry starting with a short introduction into
the Chinese automotive industry, followed by an extensive map of the industry that is divided in
industrial developments, technological developments, and institutional developments. After this chapter
we will be able to clearly indentify and analyze the interactions through time.
4.1 Introduction to the Chinese automobile industry
The Chinese automotive industry started as a small part of China’s First Five-Year Plan (1953–
57). The first Chinese-produced automobile was a medium sized truck that rolled off the line in 1956
from the First Auto Works (FAW) in Changching. For the following thirty years nothing drastically
changed in the industry and it was just another part of the struggling communistic industrial landscape.
The developments in the industry where limited during this time and vehicle outputs, in the biggest
country on earth, remained below half a million units until the 1980’s (Murray 1994). Furthermore, the
industry produced only medium-sized truck and there was no guidance in the industry that could have
changed the focus of production to other types of trucks, passenger cars were even completely off the
agenda.
The little development that did happen in China was proving to be of no use when China opened
its doors to the world in the 1970s. In the motor vehicle sector expertise was lacking, there had been
little or no development of new technologies, cultivation of skilled and creative workers, or acquisition
of technological capacity compared to foreign countries. The central government knew that for a boost
of the economy the country needed new vehicles but they did not want to depend on imports.
Therefore the central government decided that they wanted to attract foreign technology and
production capacity by setting up joint ventures. The development of the industry finally started.
The next major changes to the passenger car industry were only unveiled in July 1994 with the
publication of the Ninth Five-Year Plan for the sector (East Asian Executive Reports, 1994). Once of a
sudden the central government announced some extremely ambitious plans to accelerate and develop
the industry over the period 1994–2009. They included a series of initiatives that were designed, over
that fifteen-year period, to triple the production levels of 1994. They also focused on transforming the
domestically oriented inward looking industry into a strong global player. The plan focused around
consolidating the industry, which had become fragmented over many players, into three to four very
21
Kristian Vleugels 295123
Thesis MSc ChEB
large and internationally competitive automotive enterprise groups. These companies were meant to
have a long-term objective, to design and manufacture passenger cars that did not make use of any
imported parts or components. A plan that has not been executed to its fullest until this date.
In the last decade industry development in China took off seeing an increase in facilitation by
institutions and a turnaround in the development of the industry’s approach to technology. China
started to develop its own technology and is gradually catching up with the rest of the global
automotive industry during this period. In the more recent years the local manufacturing industry has
become very focused on technology development especially in New Energy Vehicles (NEVs), which is
widely supported by the institutional environment.
Recently China overtook the US in sales terms to become the world's largest vehicle market in
the world. The Chinese Association of Automobile Manufacturers reported record results as China’s
sales outperformed those of the US with more than 20%.
4.2 Mapping the Case Study
In this subsequent part we will map the industry according to three phases: the pre reform
phase, the post reform phase and the last era. These three phases all have had a distinct influence on
the evolution and co-evolution of the Chinese automotive industry, as will be discussed. For each of this
phase we look at the developments in institutional, technological and industrial environment.
Furthermore we map the directional causality between these developments. A quick overview can be
obtained from the tables, after which the content will be discussed into more detail in chronological
order divided over the three populations; institutions, technology, and industry.
22
Kristian Vleugels 295123
Thesis MSc ChEB
4.2.1 Pre Reform
Figure 7: Pre reform overview
Industry Co evolution, Pre Refrom
Date Institutional
19531954
19551957
19581958
19601963
19641965
19661976
Technology
Collectivization of industry takes place from China relied heavily the Soviet Union, for
1951 to 1954, by which time industry was
technical assistance, mainly for transport of
entirely in state hands
rural products and military supplies
The R&D system, which separated product
development from manufacturing and
market needs was directly controlled by
the central government
Product development was carried out solely
by the Changchun Automobile laboratory,
which was then responsible for developing
products for the major car companies in
China.
First Auto Works produced its first
Great Leap forward meant producing cars in
passenger car in 1958, the Hongqi (Red Flag)
small scale industrialization
based on a Daimler design
Industry
Industry began life as a minor component of
China’s First Five-Year Plan (1953–57) with
great emphasis on the development and
growth of heavy industry
The industry only produced trucks and was a
support pillar of the militairy. Industry
stayed under 500.000 a year as it did not
possess the capability for product
development
Small-scale industrialization throughout
rural areas
The Sino-Soviet split occurd
Mao halted all foreign technology transfer
and assistance into China
The Chinese automobile sector was cut off
from technology and foreign investment for
a crucial two decades
“Third Front” campaign
Technology for economies of scale
dissapeared
Heavy industry was decentralized and
dispersed
Cultural Revolution
No investment in the autombile industry
and no development of technology
There were hardly any cars produced, 33
automobile factories produced 150 cars
Two large national manufacturers under
China moved toward a multi layered
Simple technology involved in truck
central government control, medium sized
23 division of labor structure under the formal manufacturing helped to maintain this
1977manufacturers, and many small local
regulation
structure
1978Kristian Vleugels 295123
Thesis MSc ChEB manufacturers under local control
Formal Institutional
The first keen formal institutional influences where felt during the collectivization of the
automobile industry which took place from 1951 to 1954. By this time all industries in China were in
state hands and controlled by Mao’s one party government. One of the most important changes that
the central government made to the industry in the upcoming years was the separation of the product
development and the manufacturing.
After the first term of the Chinese Communist Party (CCP) a social and economic campaign was
developed which reflected the planning decisions from 1958 till 1961, it was called the great leap
forward. In this campaign the CCP aimed to use the vast population of China to rapidly transform the
country from an agrarian economy into a modern communist society through the process of
agriculturalization, industrialization and collectivization. The Great Leap Forward however turned out to
be a disaster. Although tremendous investments were made to transform the economy, the increases in
output as a result of these investments were low. As eloquently put by Liu Shoaqi3 China had to rely
more on education, acquiring technical expertise and applying bourgeois methods in developing the
economy. As a result there were no noteworthy developments in the Chinese Automobile industry at
this time, neither in output or technical development. The focus of Mao on the local development of the
industry led to the Soviet Sino split to occur making the Chinese automotive independent of the Soviet
industry.
The Great Leap forward created enormous tension within China and resulted in an international
volatile situation. In order to secure its industry for a potential war the CCP decided to build a range of
industrial bases in its remote yet strategically secured hinterland. This campaign was called the Third
Front Campaign and caused the automobile industry to be dispersed throughout China.
After the Great Leap forward Mao and the CCP were still not convinced that capitalism was
purged from China. In a new attempt called the Cultural Revolution they tried to further advance
socialism into the nation. During the Cultural Revolution, much economic activity was halted, with
"revolution", regardless of interpretation, being the primary objective of the country. Elsewhere, the ten
years of the Cultural Revolution also brought the education system to a virtual halt. The university
3
Liu Shaoqui was a Chinese revolutionary, statesman, and theorist. He was Chairman of the People's
Republic of China, China's head of state, from 27 April 1959 to 31 October 1968
24
Kristian Vleugels 295123
Thesis MSc ChEB
entrance exams were cancelled during this period, not to be restored until 1979 under Deng Xiaoping.
Many intellectuals were sent to rural labor camps, and many of those who survived left China shortly
after the revolution ended. According to most Western observers as well as followers of Deng Xiaoping,
this led to almost an entire generation of inadequately educated individuals. During these ten years of
revolution the Chinese economy including its automotive industry came to a standstill. The brain drain
this campaign caused was felt for years among others in the automotive industry.
Technology
The technology involved in the Chinese automotive industry was in the beginning years mainly
based on China’s partnership with the Soviet Union. Soviets helped start China’s First Auto Works (FAW)
in 1953 in the northeast city of Changchun. For FAW they provided the design and the technology for
the production of trucks that where mainly used for transport of military supplies and rural products.
The product development was centralized by the CCP and was solely carried out by the Changchun
automobile laboratory.
The technology transfer from the Soviets proved limited in the upcoming years as both local
vehicle manufacturers and suppliers were notoriously short of technology. The car manufacturing
engineering departments only had the technological capability required for maintaining routine
production; it did not possess the capability for product development, this was one of the main reasons
for the technological stagnation.
Then in 1958 the actual first passenger car was produced up till now China had only produced
trucks. The passenger cars only served purpose as limousines for the government elite. Just as first
production of automobiles started in China, Mao halted all foreign technology transfer and assistance
into China, bringing an end to the Sino soviet cooperation. Thus the Chinese automobile sector was cut
off from technology and foreign investment for a crucial two decades.
In the years to come technology development in China stagnated as Mao’s campaigns brought
the economy to a standstill. Later on during the Cultural Revolution the technological developments
even went in reverse. Due to its simple nature technology involved in truck manufacturing, sustained in
this period.
25
Kristian Vleugels 295123
Thesis MSc ChEB
Industry
The Chinese automotive industry began life as a small component of China’s First Five-Year Plan
(1953–57). The main concern in the immediate post-liberation (1949) phase was that of land reform and
economic recovery, to set the conditions for subsequent economic growth. The ensuing First Five-Year
Plan saw great emphasis placed on the development and growth of heavy industry.
In the years to come the Chinese industry only produced trucks. It was a support pillar of the
industry. The production stayed under half a million trucks a year. The industry was heavily supported
by the Soviet Union but was cut off from foreign investment during the Soviet Sino split in the 1960’s.
During the third front campaign under central planning the industry was decentralized and
dispersed around the country to make factories more immune from attack. These dispersed factories
proved to be very inefficient as the 33 automobile factories produced 150 cars in 1965, all for
governmental use.
During the cultural revolution the industry was restructured again, based on the American
structure of the big three small three, with two large national manufacturers directly under central
government control, a few medium sized manufacturers, and many small local manufacturers in each
province under the control of local governments
26
Kristian Vleugels 295123
Thesis MSc ChEB
4.1.2 Post Reform
Industry Co evolution, Post Refrom
Date Institutional
Figure 8: Post reform overview
Technology
Industry
Much expertise had been forgotten or lost
China opens the doors, they need new
and since the early 1960s there had been
vehicles but don't want to rely on imports,
The automobile industry experienced a
1979
little or no development of new
China’s government decided to reach out to
second infancy
technologies or cultivation of skilled and
foreign companies
creative workers
Formation of national markets: Chinese
Restructuring the whole car industry under
1980- government pursued a business group
Move towards in house R&D systems from a
the supervision of the China National
1982 policy under the influence of Japanese
technology push to a demand pull
Automotive Industry Corporation
management practices.
1983- Joint venture structure promoted by the
The basic production technology is being
American motor company starts first joint
1988 government to obtain foreign knowledge
transferred to the car manufacturers
venture, VW soon follows
Joint-venture car manufacturers have been The technology input still comes from
High inflation and economic hardship
1989 hit hard by governmental austerity
foreign multinationals as local development
constrain the automotive industry
measures
of R&D is slow
There is a marked tendency for smaller
China begins allowing overseas investors
Chinese vehicle and components
Demand in the Chinese market starts
1993
freedom in such matters as setting prices. manufacturers to seek FDI deals without
growing.
reference to central government.
Eventough the car manufacturers obtained
technological development, parts makers
1994- First Industrial Policy in China based on
Rationalisation of the vehicle
have not, so there is still little involvement
1995 protectionism and technology transfer
manufacturing sector
by the part makers in the product
development process.
Taxes and fees levied on auto purchases
The foreign companies do not feel the need
boost the total price of the vehicle by at
to introduce new products due to their solid
1996
Joint ventures take a monopoly position
least one-third, making them unaffordable posititon creating a market of older foreign
to most private individuals
models.
China's own auto industry, considered one
The Chinese government is calling for
of the state's least efficient but most
While business conditions are not exactly
27
1999 increased private automobile ownership in profitable, can only get stronger, most likely ideal in China, its never-ending potential
its next 5-year plan.
with continued foreign technology
makes China a risk worth taking.
Kristian Vleugels 295123
Thesis
MSc
ChEB
partnerships.
Formal Institutional
Under the leadership of Deng Xiaoping also known as the great reformer, China opens its doors.
Since the Sino Soviet split in the sixties China had hardly developed its automotive industry. Realizing
they needed new vehicles, but hesitant of becoming totally reliant on imports, China’s government
decided to reach out to foreign companies through technology licensing and the formation of joint
ventures.
In 1980 FAW merged with the Changchun Automobile laboratory, the largest R&D institution in
China, under government’s direction. At the same time national markets where formed in the
governments pursued of business group policy under the influence of Japanese management practices
introducing the first signs of market economy since 1949.
In the subsequent year the government policy still pushes hard for the development of the
automobile industry by promoting joint venture structures. For the foreseeable future the entire
industry is still being controlled by the central government as they believe that the automotive industry
is one of the pillars of establishing a solid manufacturing economy.
Due to corruption in the higher echelons of the CCP a large inflation hits the Chinese economy in
the late eighties. In response to the general economic malaise, Li Peng adopted several austerity
measures in the middle of 1988. The primary goal of these measures was to reduce economic growth
and included such measures as limiting joint ventures, curtailing capital investment, tightening fiscal and
monetary controls, re-imposing centralized control on local construction projects and cuts in capital
investment.
By 1993 the formal institutional restrictions became looser in an effort to modernize the
automobile industry as the Chinese government allows overseas investors freedom in matters as setting
prices. At this time the Chinese government has only allowed foreign investors in eight joint ventures.
These policy changes take a more concrete form in china’s industrial policy in 1994, the first real
industrial policy of the communist regime. Foremost amongst this policy is the proposed rationalization
of the vehicle manufacturing sector, which at 1994 consists of around 120 producers, many of which are
economically unviable in the longer term. The country's existing vehicle producers would be merged
into no more than three or four 'internationally competitive' corporations by 2010 at the latest. This
should be achieved by offering tax and other advantages to large volume producers. Alongside, this new
policy aims to encourage greater private car ownership on the back of rising living standards.
28
Kristian Vleugels 295123
Thesis MSc ChEB
Foreign ownership in joint ventures was limited to fifty percent to give the Chinese partners
more control and bargaining power Li Qing, head of the car division of the Ministry of Machinery
Industry, indicated at this time that foreign investors could take up to a 50% holding in Chinese car firms
as long as they brought opportunities to develop the local industry, a vague prescription which allows
ample scope for the government to increase their demands on competing foreign companies. According
to Li, foreign firms would have to obtain approval from the Ministry of Machinery Industry's car division,
the State Planning Commission and the Ministry of Foreign Trade and Economic Cooperation.
By 1996 the auto industry had still not reached its potential. Output is mainly constrained by the
heavy taxes enforced upon by the central government. Although the auto industry has been designated
a pillar industry under the Ninth Five Year Plan (1996-2000), the government has levied additional taxes
on car purchases to help finance road development. Over the past several years, annual auto output has
grown much faster than the country's road network, leading to worsening traffic congestion in the cities
and coastal provinces
In 1997 the large state owned enterprises have not yet engaged in any significant R&D activities,
although government had encouraged them to establish R&D centers. Most companies complied or
were in the process of doing so. The Chinese government is calling for increased private automobile
ownership in its 5-year plan presented in 1998. China's auto industry, at this time considered one of the
state's least efficient but most profitable, can only get stronger, with continued foreign partnerships.
Technology
In the motor vehicle sector much expertise had been forgotten or lost and since the early 1960s
there had been little or no development of new technologies, cultivation of skilled and creative workers,
or acquisition of technological capacity. Due to direct competition caused by the opening up of the
market to foreign but also domestic producers the R&D model of Chinese car production changed. The
most important Change was a move towards in house R&D systems. The product development
capability attained by establishing a strong in house R&D system helped to implement a series of
technological innovations that began from the model change. The industry changed its technology
strategy from the so called ‘technology push’ (compete adoption and imitation of the Soviet technology
in the early period) to ‘demand pull’ (emphasis on the independent product development to meet
market needs). It only introduced important technology and equipment that could not be produced
domestically.
29
Kristian Vleugels 295123
Thesis MSc ChEB
Domestic technology development does however appear to be very slow as the main source of
technology input still comes from foreign manufacturers in the 90’s. By now the car manufacturers
obtained some degree of technological development, parts makers have not, so at this time there is still
little involvement by the part makers in the product development process. Because Chinese car
manufacturer’s almost have no technological capabilities to engage in large scale production of
passenger cars by itself, its strategy for passenger cars is to build a mass production system by
participating in the multinational corporations global network.
There is a marked tendency for smaller Chinese vehicle and components manufacturers to seek
FDI deals without reference to central government. They are aware that access to foreign capital and
production technologies will largely determine which producers survive into the next century. At this
time, most are too small, under-capitalized and relatively technologically backward to survive in the
longer term, especially if the government allows more foreign competition.
By the mid nineties the general lack of R&D manifests itself in a persistent reliance on foreign
manufacturers, usually their joint venture partners or license providers, who deliver products, designs,
and often also tooling, manufacturing equipment and production extorts. For suppliers, a lack of R&D
expertise means that local suppliers are often excluded from the bidding process for new vehicles, as
they cannot provide the necessary development capabilities to develop a component from the concept
stage to the final, manufactured item. For Chinese groups that operate with foreign joint venture
partners this means those Chinese suppliers, who in many cases belong to the same group as the joint
venture company are de facto excluded from the bidding process. Chinese suppliers are thus therefore
demoted to contract manufacturer status, as opposed to being full service suppliers like European,
American or Japanese competitors that are operating in china.
By the end of the nineties several local firms gave up R&D and production of their own cars, and
merged their own plants into joint ventures. This means that the industry can only get stronger with
continued foreign technology partnerships.
30
Kristian Vleugels 295123
Thesis MSc ChEB
Industry
As can be seen in Appendix I, the post reform period started the initial growth of the industry.
The reforms of Deng introduced a gradual industry development. Part of the first reforms of Deng Xiao
Ping was the restructuring of the automotive car industry. Under the supervision of the China national
Automotive Industry Corporation, seven large business groups were established including the
nationwide local car parts manufacturers.
The industry landscape saw its first joint venture in 1983 when American Motors Corporation
signed a 20 year contract to produce their Jeep model vehicles in Beijing. Not long thereafter Germany’s
Volkswagen signed a 25 year contract to make passenger cars in Shanghai, and France’s Peugeot agreed
to another passenger car project to make vehicles in Guangzhou.
By 1985 the country produced a total of only 5,200 cars. As domestic production could not meet
demand, import totals rose dramatically, despite a 260 per cent import duty on foreign vehicles. The
country spent some $3 billion to import more than 350,000 vehicles (including 106,000 cars and 111,000
trucks) in 1985 alone. By the end of the eighties the economic hardship in China constrained the
automobile industry. This resulted in the Chinese government pledging to bail out its auto industry,
which was struggling with plunging sales and rising stockpiles at this time.
During the nineties globally, China remained a relatively insignificant producer, importer and
exporter of cars and car components, except in the production and export of certain types of specialized
lorries, military transports and agricultural machinery. As a results the Government boosted the industry
by pooling more than 100 billion renminbi (12 billion dollars) to support eight major sedan and mini car
manufacturers in the coming years to build up the automobile industry's annual output to 1,000 billion
renminbi (120 billion dollars). At this time an absolute flood of investments flowed into the automobile
sector during the 1990s from the Chinese government and foreign sources
By the end of the nineties the automobile industry increasingly relies on the private sector firms
and individual consumers for future growth. The private sector accounts for 50% of automotive sales, up
from 26% in 1991. Given the increasing importance of private demand, the outlook for the car sector
will depend in large part on the overall performance of the economy. Growth in demand is also
hampered by the lack of financing facilities and poor distribution networks.
31
Kristian Vleugels 295123
Thesis MSc ChEB
4.1.3 The Last Era
Figure 9: The last era overview ½
Industry Co evolution, The last era
Date
Institutional
Technology
Industry
Accession to the WTO means that foreign
multinationals feel better protected,
improving the efficiency of technology
transfer
Only a rather small number of models
dominate the market
2001
WTO membership means that China has to
start playing by Western rules. Local parts
requirements will be removed, and import
tariffs will be brought down to a level that
mandates a truly competitive marketplace
2002
China smooths over the import regulations China is still struggling to create an
for foreign companies who do not have to independent domestic automotive
use a Chinese partner anymore for imports industry as it still relies on foreign seeing
2003
2004
2005
IPR dispute between foreign automotive
companies and local competitors seem
troublesome
Several state owned enterprises have
started to establish their own R&D centers
although so far the large groups have not
yet independently developed any
significant products
Education in China can allow for a
comprehensive package of localized skills
and engineering
703.521
China's emerging middle class is buying
cars on a large scale
1.101.696
Sales and profits in the country are rising
exponentionally
2.018.875
Despite a slowdown in sales, there has
been no let-up in the pace of investment in
the market, with all the leading
automakers jostling for position in the
market
China has reached the car export phase,
China's policy of joint venture partnership The links with foreign companies should
but its development will differ from the
with established world carmakers has
lift design, production and sales
Japanese model set 30 years ago because
clearly succeeded in that most of the cars capabilities, and the volume of foreign and
most Chinese makers have influential joint
sold in China are made in the country and Chinese brand cars made in China before
venture manufacturing partners from the
the proportion is still improving
export will really take off
developed economies
R&D is seen as a second step after
establishing a local manufacturing
presence, which by now has largely
happened
32
Kristian Vleugels 295123
# Cars Prod
Thesis MSc ChEB
2.480.231
3.078.153
Date
2006
2007
Institutional
Technology
Local Chinese manufacturers do not pay
The domestic industry is rife with
enough attention to R&D, concentrating
allegations that engineering designs are
only on getting bigger, instead of
copied from rivals and even from partners developing their own technology they are
buying it
local parts enterprises with professional
With political support from the
strength seek for more advanced
Government, Cost-efficient local
technologies and more market shares by
enterprises will invest more into the selfacquisitions and being involved in the
innovation and expand the exportation
global division of labor
Industry
China has been the worlds second largest
consumer of automobiles in 2006
Chinas exportation of cost-efficient auto
parts maintains a fast growth and China
auto parts industry is gradually absorbed in
the matching system of foreign-funded car
makers
A combination of increasing entry and
falling prices makes China an intensely
competitive market. The core challenges
for multinational firms are reducing the
price of their products, and for domestic
brands increasing the quality of their
products
# Cars Prod
5.233.132
6.381.116
2008
WTO membership has resulted that trade
disputes will be dealt with as laws become
better enforcable solving the trade dispute
between China and the West
BYD plans to unveil the country's first
homegrown electric vehicle for the mass
market, at least a year ahead of similar
efforts around the world
2009
The government has encouraged mergers
to strengthen the domestic industry for
some time, particularly as international
firms have become prominent
China's Ministry of Science and Technology
is veering away from its previous
The industry is starting to develop its own
preference for clean diesel as an
unique segment focussing on renewable
alternative fuel of choice and is moving
energy
towards hybrids
10.383.831
2010
China is proving that a definitive incentive
policy on alternative fuel vehicles will
bring investment in the local production of
new products
China has overtaken the US as the world's
Germany's VW is the latest carmaker to
largest car market. Ford Motor's executive
form a high-profile partnership aimed at
chairman, Bill Ford Jnr, has been quoted as
developing electric vehicle (EV) technology
saying it would be 'the height of arrogance'
based on Chinese design
to dismiss Chinese brands as serious rivals.
15.000.000
Figure 10: The last era overview 2/2
33
Kristian Vleugels 295123
Thesis MSc ChEB
6.737.745
Formal Institutional
In 2001 the government establishes policy to consolidate the automotive industry. After various
efforts experts seem weary that this attempt is going to work. Reducing the 100-plus carmakers to four
or five large conglomerates, Ashvin Chotai4 sees this as a long-term goal. "In the past, the government
has failed miserably to consolidate the industry," he says. "We see more fragmentation in the near term
than consolidation."With growing fragmentation comes a capacity glut, which industry observers say
already is looming as a major problem.
In addition to internal liberalization, at this time Deng also established a series of "special
economic zones" in which foreigners could invest in China taking advantage of lower labor costs. This
investment helped the Chinese economy grow.
China’s accession to the World Trade Organization in 2001 immediately escalated activity,
prompting major infrastructure development and pressuring the government to continue its support of
the economy. In 2002 China smoothes over import regulations in order to ease tension over its
expanding trade surplus with the US. In 2003 the first IPR lawsuit goes to trial in China since it joined the
WTO, as the domestic industry is filled with allegations that engineering designs are copied from rivals
and even from partners.
By 2004 several state owned enterprises have started to establish their own R&D centers
although so far the large groups have not yet independently developed any significant products. On this
evidence, China's policy of joint venture partnership with established world carmakers has clearly
succeeded in that most of the cars sold in China are made in the country and the proportion is still
improving. However, the country's planners had hoped that by now there would be a healthy export
trade, and this is not yet happening. The inertia is causing discomfort in political circles and some change
of behavior at major companies. Furthermore, Chinese carmakers face the probability that they will be
targeted in patent infringement cases once their cars arrive.
In 2006 the government aims at a significant development of the automobile industry in the 11 th
five year plan period. With political support from the Government, Cost-efficient local enterprises will
invest more into the self-innovation and expand the exportation.
4
Ashvin Chotai, managing director at Intelligence Automotive Asia Ltd
34
Kristian Vleugels 295123
Thesis MSc ChEB
In 2008 China lost a trade dispute at the World Trade Organization for the first time since its
WTO accession in 2001 as a dispute settlement panel has made an effective ruling in favor of the United
States and the European Union against China on a car parts tariff dispute. This contributes to the
improved international environment for the automotive industry.
By 2009 the consolidation plans of the government still haven’t worked out. The government
again revealed plans to increase consolidation in the sector, which would involve reducing the number
of manufacturers from 14 to 10. The government has encouraged mergers to strengthen the domestic
industry for some time, particularly as international firms have become prominent. Other elements
include providing subsidies of around CNY5bn (US$730mn) to support car purchases in poor, rural areas
throughout the year, scrapping older cars to make way for new purchases, developing consumer finance
and increasing the government's use of domestic models.
In 2010 the government shifts its focus more on the intrinsic development of the industry as
China plans to impose strict fuel economy standards for vehicles following similar proposals in the US.
The New York Times has reported that An Feng, president of the Innovation Centre for Energy and
Transportation, said that by 2015, carmakers in China will be required to raise the fuel economy of their
vehicles 18% compared with the standards introduced on January 1. China is proving that a definitive
incentive policy on alternative fuel vehicles will bring investment in the local production of new
products. The central government has implemented a pilot program in five Chinese cities that are mostly
home to major carmakers, which is now being matched by local authorities and already securing
production projects.
Technology
The 2001 accession to the WTO means that foreign multinationals feel better protected,
improving the efficiency of technology transfer. Although the accession improves the position of the
foreign manufacturers in China the domestic manufacturers still struggle to operate independently and
still need to rely on the foreign overseeing.
In 2003 the president of electrical, electronic, safety and interior systems, Delphi Corporation
David Wohleen said "World class quality is not an option, it is a requirement." Wohleen indicates that
China does offer a comprehensive package of localized skills and engineering. He says that while foreign
companies are certainly interested in global exports from China, its main interest is in serving the
"depth" of the domestic market. This depth is what’s driving the foreign car manufacturers for years.
35
Kristian Vleugels 295123
Thesis MSc ChEB
By 2004 R&D is still seen as a second step after establishing a local manufacturing presence,
which by now was largely happened – thanks to numerous joint-ventures with Western (and later as
Eastern firms) While China no longer relies on vehicle imports it still relies on foreign seeing, and
challenge now is to create an independent Chinese automotive industry. Beijing motors and Dongfeng
show interest in increasing R&D work in China (Holweg et al, 2005) yet concerns were also raised with
regards to the competitiveness of such products, and whether they would meet the standards
European, US, Japanese and Korean models provided for the Chinese domestic market. Since the
Chinese designed products were manufactured under the same cost structure as the non Chinese
products, design inferiority is implied. The links with foreign companies should lift design, production
and sales capabilities, and the volume of foreign and Chinese brand cars made in China, before export
will really take off. In 2006 Local Chinese manufacturers do not pay enough attention to R&D,
concentrating only on getting bigger. Instead of developing their own technology they are buying it.
In 2007 according to Frank Zhao, Director of Zhejiang Geely Holding Group Ltd., Chinese
domestic carmakers must craft compelling brands, retain talent and develop their own technology. But
the Chinese carmakers' growth strategies are confusing, he said. They do not pay enough attention to
R&D, concentrating only on getting bigger. Instead of developing their own technology, Chinese
companies are buying it.
In 2008 we suddenly see that China has skipped a step in technology development and has
acquired an advanced position in the new energy vehicle field when BYD unveiled the country's first
homegrown electric vehicle for the mass market, at least a year ahead of similar efforts around the
world.
In support of China’s dominant position China's Ministry of Science and Technology is veering
away from its previous preference for clean diesel as an alternative fuel of choice and is moving towards
hybrids, according to Automotive News. An advisor to the ministry claims that Minister Wan Gang is
'very much in favor of hybrid technology', as it provides a stepping stone to the use of all-electric cars.
This is considered a more long-term alternative to petrol in China. One group not so encouraged by the
move towards hybrids are the European carmakers who had been lobbying the Chinese government to
use their clean diesel technology.
We see a new trend occurring in 2010 when suddenly foreign manufacturers want joint
ventures with Chinese companies to learn from their technology on the NEVs. Germany's VW is the
latest carmaker to form a high-profile partnership aimed at developing electric vehicle (EV) technology.
36
Kristian Vleugels 295123
Thesis MSc ChEB
The company has signed a memorandum of understanding with Chinese battery manufacturer BYD,
which has already produced its own plug-in electric car, the F3DM, through its BYD Auto unit. Under the
terms of the agreement, the two sides will study options for joint development of lithium-ion battery
packs for hybrids and EVs.
Industry
As can be seen appendix I, the industry skyrocketed in the last era. The WTO accession in 2001
marked the boom of the automobile industry in China. This is another strong indicator that the formal
industry governing institutions are fading away as dominant driver of industry development.
According to Andy Turton, President of NFO Automotive in North America in 2003 "China is
revving up to potentially become a huge player in the global automotive market, as Western automotive
manufacturers struggle for differentiation among their individual brands, China is ahead in the game
when it comes to successfully managing the emotional content of their brands." "The 80% sales growth
in China during the first six months of this year was not driven by consumers wanting a car to get from
point A to point B. "Clearly, there is a growing recognition that cars of particular brands have a
considerable impact on one's social standing, and the automotive market in China has taken note. Now,
there are an overwhelming number of aspirational cars for consumers to choose from, and this
excitement of being able to buy social mobility is fueling the explosive growth in vehicle sales this year."
This indicates that the growth of a wealthy middle class in China is propelling industry growth. Although
sales and profits in the country are rising exponentially, politics in the region can quickly turn volatile,
laws are up for debate, a modem banking system still is in its infancy and international policy has been
slow to take hold. Nevertheless, the world's leading carmakers and parts suppliers have reached a
consensus that China is the most important place to be.
After an explosive couple of years, China's car market hit the buffers in 2004. Despite the
slowdown in sales, there has been no let-up in the pace of investment in the market, with all the leading
carmakers jostling for position in the market. Carmakers are talking big numbers - altogether, foreign
carmakers are spending US$13bn to triple annual capacity to 6m units by the end of the decade. But this
has raised new fears that overcapacity, the bugbear of the auto industry in its developed markets, could
hit China as well.
By 2005 the industry takes up speed again and China established itself as the third
largest automobile market since 2003 and is increasingly taking up the lead role in world businesses.
37
Kristian Vleugels 295123
Thesis MSc ChEB
The industry witnessed a sales growth by 44.4% year-on-year, the sales turnover of the
Chinese automobile industry being 453.132 billion Yuan. China has reached the car export phase, but its
development will differ from the Japanese model set 30 years ago because most Chinese makers have
influential joint venture manufacturing partners from the developed economies. Their links with foreign
companies should lift their design, production and sales capabilities, and the volume of foreign and
Chinese brand cars made in China for the international market can be expected to rise.
Even moving up one step in 2006 when car sales reached 7.2797 million units in China with a
year-on-year rise of 27.32%, and 7.216 million units were sold, up by 25.13% year-on-year. China has
been the worlds second largest consumer of automobiles in 2006, motorcycle producers exported
6.4035 million motorcycles to overseas markets, up by 41.11% year-on-year. And the foreign exchange
earnings got to US$2.52 billion, a year-on-year rise of 41.35%.
By 2007 China is both the fastest growing motor vehicle market and the fastest growing vehicle
producer. China is also the world's second-largest car market. Despite competition from international
brands, domestic carmakers sold the most passenger vehicles in China in 2007. Thanks to a wave of new
models from such carmakers as Chery Automobile Co. and BYD Auto Co., domestic brands grabbed 28.7
percent of the market last year. Japanese brands were second with 28.3 percent, according to
Automotive Resources Asia, a unit of J.D. Power and Associates. China automotive companies are
moving abroad as Salinas chose China FAW Group Corp., a major state-owned automaker in China to
produce cars in Mexico.
2008 proved to be difficult as sales of passenger vehicles in China fell 10% in November from a
year earlier to 522,800 units, according to the semiofficial China Association of Automobile
Manufacturers. It was the third monthly decline in four months. Yale Zhang, a Shanghai-based senior
car-industry analyst for U.S.-based CSM Worldwide, said "big ups and downs" in sales of young
indigenous independent carmakers such as Chery are a cause for concern. Nigel Harris, CMO at Ford
Motor Co, talked about his confidence in a promising Chinese car market. According to Harris, China will
overtake the US as the world's No. 1 car market, and it could happen in 2015, but North America has
had a big correction. A combination of increasing entry and falling prices makes China an intensely
competitive market, and consolidation in the automotive sector is likely. The core challenges for
multinational firms are reducing the price of their products, and for domestic brands increasing the
quality of their products.
38
Kristian Vleugels 295123
Thesis MSc ChEB
The industry took a turn in 2009 as the World Trade Organization’s (WTO) Appellate Body has
upheld a ruling that China's import tariff structure for automotive parts contravenes membership
commitments. A complaint was brought against China by the US, EU and Canada in 2006, which claimed
that the tariffs discriminated against foreign parts and aimed to pressure foreign parts makers into
establishing Chinese facilities in order to avoid the tariffs.
By 2010 it becomes official China is the automotive force to be reckoned with, especially the
new energy vehicles of domestic producers. In 2010 China has overtaken the US as the world's largest
car market. Besides this the local brands are catching up with the foreign manufacturers. Ford Motor's
executive chairman, Bill Ford Jnr, has been quoted as saying it would be 'the height of arrogance' to
dismiss Chinese brands as serious rivals. The fact that Geely has acquired Volvo from Ford and plans to
make the Swedish unit a viable one is testament to this, while the Warren Buffet-backed BYD Auto has
big plans of its own. The company has been clear in its goal of wanting to become the world's largest
carmaker by 2025.
39
Kristian Vleugels 295123
Thesis MSc ChEB
Chapter 5: Analyses
In this chapter I expand on the co-evolutionary theory to explain how China moved from a
laggard to an uncontested leader in this industry. Although academic disciplines from economies to
strategic management have provided a variety of theories to account for industrial success and failure,
not one theory can adequately explain why and how China came to dominate the automotive industry,
co-evolution theory could provide the answer. First we start with the analyses of the causality between
technology, the industry and the formal institutions in the three periods. Hereafter we look at how
these causalities relate to the existing theory of the co-evolution and if this theory can explain the
industry developments in China.
40
Kristian Vleugels 295123
Thesis MSc ChEB
Co evolution causalities
Date
Pre reform
Date
Post reform
Date
Last era
Institution→ Industry
1953-1954 Institution → Technology
Technology → Industry
1979
Industry → Institutions Industry →
Technology Institution → Technology
Institution → Industry
2001
Institutions → Technology
1980-1982
Technology → Industry Institution →
Industry
2002
Industry → Institution
2003
Institution → Technology
1955-1957
Technology → Industry
Institution → Industry
1958-1958 Institution → Industry
1983-1988 Technology → Industry
1960-1963
Institution → Industry
Institution → Technology
1989
Institution → Industry Institution →
Technology
2004
Institution → Technology
1964-1965
Institution → Industry
Institution → Technology
1993
Institution → Industry Institution →
Technology
2005
Industry → Technology Institution →
Industry
1966-1976
Institution → Technology
Institution → Industry
1994-1995 Technology → Industry
2006
Technology → Industry
Technology → Industry
1977-1978 Institution → Industry
Institution → Technology
1996
Technology → Industry Institution →
Industry
2007
Institution → Industry Technology →
Industry
1999
Institution → Industry
2008
Institution → Industry Technology →
Industry
2009
Technology → Industry
2010
Technology → Industry
Figure 11: Co-evolution causalities
41
Kristian Vleugels 295123
Thesis MSc ChEB
5.1 Analyses Pre Reform Causality
In the first phase we can distinct three clear moments of directional causality. It shows that the
institutions influence the industry when the central government decides to centralize the entire
industry. Furthermore the Institutions also influence the level of technology as they engage in a
relationship with their political ally, the soviets, in order to obtain the needed technology. Additionally
the technology also heavily influences the industry, as the lack of knowledge on building passenger cars
resulted in an industry that solely existed out of trucks.
In the time hereafter until the reform it is obvious that institutions remain to have the largest
influence on the industry. In the pre reform period, the formal institutional influences mainly had a
negative effect on the industrial development. At the same time technology, or rather the lack of it,
influenced the industry, since the lack of technology in product development resulted in a stagnated
production number. The industry was only capable of producing one type of truck so it did not take long
for the industry to mature. The institutions also influenced the technology as the government
centralized the R&D for the automotive sector in one laboratory and disconnected it from the
manufacturers. This meant that the development of products, even though it were only trucks at this
time, was not based on consumer demand, a trend that would remain for many years.
In the subsequent time we mainly see the influences of campaigns like the Great Leap Forward
and the Cultural Revolution, initiated by the formal governmental institutions, which take a grip on
nationwide industrial development. During the great leap forward the institutions clearly influence the
industry as they promoted small scale industrialization throughout the rural areas causing the industry
to be spread out nationwide, creating huge inefficiencies.
An important influence during the Great Leap Forward campaign is the Soviet-Sino split.
Through this event we once again see a very clear influence of the institutions on the development of
the technology. Since Mao’s policy halted all Soviet technology transfer and assistance into china it cut
of the automobile industry from technology and financing for a crucial two decades. Crucial because
other Asian nations, now known for their automobile industry, like Korea and Japan, were at a similar
level of development at this period, this could have prevented China to become a laggard in the
international automotive industry.
The subsequent “Third Front” campaign is another great example of how the governmental
institutions influenced the industry, as the automotive industry was decentralized and dispersed
through the hinterland to make it less vulnerable to attack in times of war. Yet again a second order
42
Kristian Vleugels 295123
Thesis MSc ChEB
effect on technology occurred as the industries central product development laboratory was
disconnected from the industry.
The Cultural Revolution initiated by the government brought the Chinese economy to a grinding
halt, causing it to lag even further behind its “competing” nations.
The low level of technology involved in producing simple trucks kept the industry intact at the
same level as 25 years ago, the end of the Cultural Revolution in 1979. In a last effort the government
yet again rearranged the industry by assigning two large national manufacturers under central
governmental control a couple of medium sized manufacturers and many small manufacturers under
local governmental control.
The overall institutional behavior at this period is influenced by the ideology of communism.
Communism made the central government believe that there was a lack of independence and therefore
they heavily focused on reorganizing the national economy and industries, amongst which the
automotive industry. Another major driver of institutional decision-making at this period was caused by
a fear of Western countries to undermine their regime and possibly attack China, causing drastic
changes in the industrial landscape.
The Pre Reform Period
•In the pre reform period we see that the connections and causalities all flow from the formal
institutions towards the government. This one directional "anti co-evolution" effect is reflected in a
stagnation or even decline of the automotive industry in this period. This effect signals that without
co-evolution meaning no relations and causalities between the populations we also observe no
development in the industry. Which is a backward explanation of co-evolution through inverted
causality resulting in reversed industrial development.
5.2 Analysis Post Reform Causality
In the initial phase of the reform we see the first influences of the industry on the institutions
after having seen the institutions influence the industry for 3 decades. The experience of a second
infancy of the industry, after 30 years of political and economic malaise, influences the government to
take measures in improving the industry’s position. The government does not want to import cars to
stimulate the economic development as this would harm the economy; therefore they decide to reach
out for foreign manufacturers in order to establish joint ventures to produce the cars domestically.
43
Kristian Vleugels 295123
Thesis MSc ChEB
In the subsequent phase we see a change in the industry in the form of increased competition
caused by the opening up of the market to foreign but also domestic producers, which influences a
change in the R&D model of Chinese car production. The most important change was a move towards in
house R&D systems. This move was needed for two reasons; to adjust the products to customer
demands and to be able to transfer knowledge from foreign manufacturers to domestic manufacturers.
Foreign manufacturers where drawn to China because they saw a huge potential in a country with a
population in excess of a billion people that were unable to drive a car because the nation had been
closed for three decades. At the same time institutions again influence the industry as they restructure
the car industry for the fourth consecutive time, placing the entire industry under the supervision of the
China National Automotive Industry Corporation.
The increased need for technology is acknowledged by the government who promotes joint
ventures with foreign companies further by allowing more joint ventures to take place creating causality
between technology and institutions. The establishment of these joint ventures changed the industrial
landscape for good. The focus of the institutions on the automotive industry is strengthened further
when the industry is dubbed as a pillar industry. The Chinese government declared the automotive
industry a “pillar” industry in 1985, targeted for financial and developmental assistance.
In the subsequent period technology is still the main driver for industry change as the need for
technology in the Chinese automotive industry allows an increased amount of joint ventures. The
government starts to ease regulation in order to improve the industry’s development. A new trend that
is happening is the tendency for smaller Chinese vehicle and components manufacturers to seek FDI
deals without reference to central government. This marks a starting point of a reduced dependence on
the government for development in the automotive industry.
Technology also influences the development of the industry in different ways as the lack of
technology of the part suppliers only allows them to become contractors instead of full service providers
as can be seen in foreign car markets, restraining the domestic industry. Also the lack of technology of
the local joint ventures partners allows the foreign partners to introduce older products. Technology
joint ventures influenced the development of the industry also by creating a barrier for the indigenous
industry that was not operating in a joint venture. Technology also influences the institutional systems
as the government changes policy in order to capture the importance of technology.
During the post reform period the industry changed due to an ease of regulation by the
government, the opening up of the market and the transfer of technology towards domestic
44
Kristian Vleugels 295123
Thesis MSc ChEB
manufacturers. During the nineties industry became more supported by industrial growth and private
firms so there was a decreased dependence on institutional support. This proved to be one of the main
starting points for the industrial boom in the last era.
During the post reform period we see new drivers of institutional decision making emerge. After
the failed attempts of industrial reform a bigger gap has been created in industrial development than
before the change to communism. In order to bridge this gap the government starts to slowly loosen
control and starts changing the regulations to better support the development of industries, with in
particular the automotive industry. Through time these improvements result into more opportunities in
the Chinese automotive supported by more entrepreneurial actions. During the end of this period we
see the establishment of various privately held automotive brands like Geely in 1994, Foton Motor in
1996, Chery in 1997, Hebei Zhongxing Automobile in 1999, Rongcheng HawTai Automobile in 2000 and
Qinhuangdao Jincheng in 2000 all currently producing between 30,000 to 350,000 cars a year.
The Post Reform Period
•In the post reform period we see that the turnaround in government policy influences the
interaction between the three populations to a large extent. Slowly but surely we see that over the
period the interaction and the causality between the populations picks up resulting in an increased
development of the industry. Especially the importance and the influence of technnology on
development is recognised in this period Towards the end of this period the dependence on
insitutions for industrial growth is almost gone paving the way for causalities to increase in the
chinese industry. A process which is supported by a large amount of entrepreneurial actions.
5.3 Analysis causality Last Era
In the first phase of the last era formal institutions in the form of accession to the WTO
influence the level of technology as the foreign manufacturers are more willing to share technology as
they feel better protected. WTO accession is another step towards a more open market economy
resulting in an increase of sales in the automotive industry marking a start of the automotive boom in
China.
The domestic automobile industry in China is struggling to develop itself independently and then
we see the government changing policy in order to accommodate further foreign support for the
industry. So here we observe the industry influencing governmental decision making but subsequently
we see the government’s decision making also influence the industrial development. This support for
45
Kristian Vleugels 295123
Thesis MSc ChEB
joint ventures opens up more opportunity for foreign car manufactures in China creating a better
institutional environment in which business can thrive.
Even though IPR disputes exist no foreign manufacturer has decided to abandon the Chinese
industry. It does however affect the ease of technology transfer between foreign and local
manufacturers to some extent.
The state owned enterprises are starting to independently develop products which have not
resulted in any new developments. This indicates that the market is being dominated by foreign brands
and products that are produced in joint venture structures. At this time the domestic automobile
industry has still a long way to go to catch up with these conglomerates.
In the following year the industry took a turn when it started exporting cars, resulting in a
change to high standard technology that is needed for exportation which was being leveraged by their
influential joint ventures with foreign multinationals
In the subsequent year we see that technology is still influencing the industry as it actually
drives a wedge between the foreign joint ventures and the independent local manufacturers creating
large discrepancies in technology and competition.
Institutional support for exportation changes the industry from a domestic focused
manufacturing industry into a domestic and export focused automotive industry. At the same time the
support industries are catching up as they are supported by the global division of labor.
Suddenly we see that the Chinese domestic companies have made a technological leap they
stopped looking at incremental technology and design and leap forward with radical innovations in new
energy vehicle production. BYD has taken a leading role in this technological revolution. Emphasizing on
the new energy vehicles gives the domestic Chinese automotive industry a new focus. The eased
institutional policies have changed the traditional industry and made it much more competitive
demanding lower prices of the multinationals and increased quality of the domestic producers.
Technology is changing the industry as the domestic market has become very much focused on
the development of new energy vehicles which will prove to be critical for China’s development, as the
Chinese know that it would not be possible for all Chinese to drive a fossil fuel car. The technology
therefore changes the institutions as the government supports the new energy vehicles through policy
changes.
46
Kristian Vleugels 295123
Thesis MSc ChEB
The leap in new energy vehicle technology China made has created an interesting learning
relation from the foreign manufacturers from the Chinese manufacturers creating an industry learning
turnaround. Improved policy from the government improves this relation.
The drivers of institutional decision making changed again during the last era. Now the
institutions are driven by the success of the industry the needs of manufacturers and the development
of new technologies. They are therefore e becoming more focused on specific parts of the industry and
often act as incubators for the development of new technology.
The Last Era
•In the last era we have seen a dramatic increase in the amount of relations and causalities between
the industry technology and institutional populations. This increase in populations has gone hand in
hand with industry growth showing strong signals of co-evolution. Especially the development of
the NEV has been a result of strong interaction between technology and the national instiutions.
Also the interaction between the industry and its potential and the results on the supporting
insitutions has been.
47
Kristian Vleugels 295123
Thesis MSc ChEB
5.4 Fine-grained environmental Analysis
In this part we will analyze the environment in which the Chinese automotive industry resides in
finer detail. This analysis is performed to statistically underpin the extent to which the context
influences automotive development in China, in order to increase the validity of this research. This
detailed analysis is based on the approach of Berry et al (2010) that was constructed to develop the
institutional theories of national business, governance and innovation systems. We perform this detailed
analysis by looking at the correlation between cars produced and four institutional dimensions e.g.
economic, political, demographic and knowledge.
Where Berry et al (2010) uses nine dimensions for analysis we only selected four of the most
appropriate measures that apply to our research topic. The analysis of these four variables allows us to
put our analysis of the Chinese automotive industry developments into a finer grained context of
institutional development. Each of the four dimensions exists out of several variables in line with the
research of Berry et al (2010). We can only plug in the variables which are not constant so we had to
exclude the policy-making uncertainty. Even though we exclude this variable we still have enough
variables to represent all the dimensions. With this information we can construct the following
correlation matrix.
Dimensions And Their Variables
Dimensions
Variable
Automotive Development
Cars Produced
Economic Development
Income
Inflation
Exports
Imports
Political Development
Policy Making Uncertainty
Political Rights
Civil Rights
Size of the State
WTO Agreement
Demographic Development
Life Expectancy
Birth Rate
Population Under 14
Population Over 65
Knowledge Development
Patents
Figure 12: Variable overview
Scientific Articles
Years available
Source
1980-2009
Ward's
1960-2009
1961-2009
1970-2009
1970-2009
WDI
WDI
WDI
WDI
1960-2009
1973-2009
1973-2009
1960-2009
1960-2009
POLCONV
Freedom House
Freedom House
WDI
WDI
1960-2009
1960-2009
1960-2009
1960-2009
WDI
WDI
WDI
WDI
1981-2009
1985-2008
WDI
WDI
48
Kristian Vleugels 295123
Thesis MSc ChEB
Pearson Correlations Cars Produced in China
Cars Prod
Income Inflation Exports Imports SOSC
WTO member
Pol Rights Civ Rights Life Expac Birth Rate Pop < 14 Pop > 65 # Patents # Articles
Cars Prod
Correlation
1 0,959097 -0,15749 0,797041 0,741564 -0,50788 0,8144487 0,49040584 -0,27972 0,844803 -0,80702 -0,84202 0,871676 0,992079 0,988796
N
30
30
30
30
30
30
30
30
30
29
29
30
30
28
22
Income
Correlation
0,959097425
1 0,173593 0,910969 0,86297 0,491424 0,8618964 0,50194088 -0,32353 0,683869 -0,69431 -0,87652 0,964817 0,979365 0,938577
N
30
50
49
40
40
50
50
37
37
49
49
50
50
28
22
Inflation
Correlation -0,157487926 0,173593
1 0,295194 0,399883 0,436211 0,0222331 -0,0294337 0,145909 0,294803 -0,42642 -0,41502 0,264116 -0,13288 -0,20064
N
30
49
49
40
40
49
49
37
37
48
48
49
49
28
22
Exports
Correlation
0,797040915 0,910969 0,295194
1 0,978801 0,546704 0,7890362 0,47564407 -0,2916 0,954378 -0,8323 -0,93625 0,961653 0,960157 0,706259
N
30
40
40
40
40
40
40
37
37
39
39
40
40
28
22
Imports
Correlation
0,741564076 0,86297 0,399883 0,978801
1 0,610244 0,7585873 0,40067613 -0,33827 0,950264 -0,82965 -0,9446 0,938872 0,911223 0,62033
N
30
40
40
40
40
40
40
37
37
39
39
40
40
28
22
SOSC
Correlation
-0,507877148 0,491424 0,436211 0,546704 0,610244
1 0,303888 -0,2412637 -0,44782 0,773384 -0,73168 -0,79847 0,628244 -0,24096 -0,53298
N
30
50
49
40
40
50
50
37
37
49
49
50
50
28
22
WTO member Correlation
0,814448732 0,861896 0,022233 0,789036 0,758587 0,303888
1 0,3927922 -0,44233 0,474081 -0,51774
-0,68 0,818643 0,863537 0,729668
N
30
50
49
40
40
50
50
37
37
49
49
50
50
28
22
Pol Rights
Correlation
0,490405845 0,501941 -0,02943 0,475644 0,400676 -0,24126 0,3927922
1 0,540531 0,481842 -0,44739 -0,36255 0,50774 0,577883 0,282594
N
30
37
37
37
37
37
37
37
37
36
36
37
37
28
22
Civ Rights
Correlation
-0,27971834 -0,32353 0,145909 -0,2916 -0,33827 -0,44782 -0,442326 0,54053114
1 -0,27299 0,30865 0,331128 -0,32419 -0,23808 -0,44901
N
30
37
37
37
37
37
37
37
37
36
36
37
37
28
22
Life Expac
Correlation
0,844802709 0,683869 0,294803 0,954378 0,950264 0,773384 0,474081 0,48184229 -0,27299
1 -0,75717 -0,80837 0,701222 0,882573 0,754931
N
29
49
48
39
39
49
49
36
36
49
49
49
49
28
21
Birth Rate
Correlation
-0,807024196 -0,69431 -0,42642 -0,8323 -0,82965 -0,73168 -0,51774 -0,4473904 0,30865 -0,75717
1 0,794343 -0,75646 -0,84638 -0,66805
N
29
49
48
39
39
49
49
36
36
49
49
49
49
28
21
Pop < 14
Correlation
-0,842020851 -0,87652 -0,41502 -0,93625 -0,9446 -0,79847 -0,679999 -0,3625491 0,331128 -0,80837 0,794343
1 -0,94888 -0,88419 -0,88072
N
30
50
49
40
40
50
50
37
37
49
49
50
50
28
22
Pop > 65
Correlation
0,871676305 0,964817 0,264116 0,961653 0,938872 0,628244 0,8186431 0,50774039 -0,32419 0,701222 -0,75646 -0,94888
1 0,929376 0,821447
N
30
50
49
40
40
50
50
37
37
49
49
50
50
28
22
# Patents
Correlation
0,992079076 0,979365 -0,13288 0,960157 0,911223 -0,24096 0,8635372 0,5778827 -0,23808 0,882573 -0,84638 -0,88419 0,929376
1 0,974249
N
28
28
28
28
28
28
28
28
28
28
28
28
28
28
20
# Articles
Pearson Correlation
0,988795986 0,938577 -0,20064 0,706259 0,62033 -0,53298 0,7296683 0,28259378 -0,44901 0,754931 -0,66805 -0,88072 0,821447 0,974249
1
N
22
22
22
22
22
22
22
22
22
21
21
22
22
20
22
Figure 13: Correlation between the dimension’s variables and cars produced
49
Kristian Vleugels 295123
Thesis MSc ChEB
Based on these outcomes we can only say that there is a positive correlation between the
development of cars produced and income, exports, imports, size of state consumption, WTO
membership, political rights, life expectancy, population over 65 and the number of patents & articles.
Let’s take a closer look at these variables and see whether they are in line with our earlier findings.
Economic Development
We start analyzing the variables by considering economic development as suggested by Whitley
(1992). The international business literature has focused on three specific indicators of economic
development. Development is seen in terms of income level (GDP per capita), prevailing inflation rates,
and intensity of trade with the rest of the world. These indicators are important, because they are
correlated with consumer purchasing power and preferences, macroeconomic stability, and the
openness of the economy to external influences. These factors have been found to influence, for
instance, foreign market entry mode, firm survival and performance, amongst other variables.
In China there is a very high correlation between the development of income and the
development of the cars produced. This is completely in line with our factual observations of the
developments in China, where we saw that the development of a large middle class has caused for a
great demand of automobiles in China. Especially when we look at graphical development in Appendix II
we see that income and cars produced follow almost the same trajectory. Another important
observation we make here is the importance of high market potential for manufacturers as the slope of
the production line is steeper than the development of income.
The correlation between cars produced and inflation is negative. In a planned economy like
China the inflation rate is strictly controlled by the government who makes adjustments to inflation
through their control over the financial system. This means that it follows a rather random path against
development as can also be seen graphically in Appendix II.
Surprising is the positive correlation between import and export and the Chinese automotive
industry, since the Chinese government imposes high tariffs on car imports to ensure domestic
production. However over the last years China has also become an exporter of automobiles and is
leveraging its low cost position to become a strong player in the international car market. This could
explain why the correlation between exports is slightly higher than the correlation between imports.
The high correlation of imports and exports is also an indication of an increased openness of the Chinese
economy to foreign influences over the last decades which has clearly been case.
50
Kristian Vleugels 295123
Thesis MSc ChEB
Political Development
In addition to different levels of economic development, the institutional literature has also
emphasized on the nature of the political systems (Henisz, 2000; Henisz & Williamson, 1999; Whitley,
1992 in Berry et al, 2010). Our approach focuses on formal institutions and follows China along
continuous political dimensions that are in line with Berry et al (2010), such as institutional checks and,
democratic character, the size of the state related to the economy, and external trade associations.
These variables have been found to correlate with the choice of foreign markets to enter, the choice of
entry mode, and foreign direct investment flows.
The size of state consumption is slightly negatively correlated with the development of cars
produced. Intuitively we would say that the expenditure of the government should have been increased
over years to facilitate the development of the industry, but this would be a wrong observation. The
state facilitates the industry more through regulatory ways than through consumption. When we look at
a graphical trajectory of state consumption in Appendix II we can indeed see that the state consumption
has doubled immediately after the reform and stayed at a steady level since.
Political rights are slightly positively correlated with the development of the cars produced in
China. This is not as surprising as the political rights in China have improved over time. This included
more freedom for companies to do business in China, through joint ventures and other contractual
agreements which benefited the development of the automotive industry.
The development of the civil rights however is negatively related to the development of the cars
produced in China. Where the automotive industry only improved over time the civil rights only
deteriorated according to the experts of Freedom House. Besides this the civil aspects of politics has
hardly come to light in any industry in China.
The fact that the WTO agreement is positively related to the development of the cars produced
comes as no shock. As earlier noted in the factual analysis the membership of the WTO has boosted
China’s economy and is seen by experts as one of the key instigators of the industry boom that started
in late 2000. This is mainly a result of the influence the WTO membership has on the overall economical
environment due to the standards that are attached to membership of the WTO.
Demographic Development
Institutional theory also identifies demography as a key dimension of development as suggested
by Whitley, 1992. It is seen in terms of the size, growth, age structure, and qualities of the population.
These dimensions have direct implications for market attractiveness and growth potential. We focused
51
Kristian Vleugels 295123
Thesis MSc ChEB
the analysis on differences in life expectancy rates, birth rates, and the age structure of the population,
these factors closely follow the attractiveness of an economy for firms according to Berry et al (2010).
There is a positive correlation between the numbers of cars produced and the development of
life expectancy. This increase of life expectancy points to an increase in market attractiveness. This is in
line with earlier reasoning and again underscores the importance of market potential for the
development of the automotive industry in China.
The fact that there is a negative correlation between the birthrate and the number of cars
produced is caused by the one child politics. As can be seen in the graphical analysis in Appendix II the
birthrate is decreasing over time while the number of cars produced is increasing over time.
Furthermore can a decreasing population result in a decrease of the consumer market over time.
In line with the negative correlation of birth rate is the negative correlation between cars
produced and population under 14 and the positive correlation of people over 65. The increase of
people over 65 means that there is an improvement of life standards in China hence more people can
afford a car. The decrease of population under 14 means that there is also a decrease in growth
potential of the car market as less consumers will be entering the market.
The demographical effects of birthrate and age structure will not affect the automotive market
in the short run as until now only a small percentage of the 1.3 billion Chinese people own a car. When
the market becomes more saturated these numbers will become increasingly important for the
development of the industry.
Knowledge Development
The institutional literature also proposes that development depends on the capacity to create
knowledge and to innovate, which has important implications for a countries role in the global economy
(Furman et al., 2002; Nelson & Rosenberg, 1993: in Berry et al, 2010). Proximity to knowledge has been
argued to influence the location choice of multinational firms, because of the potential for spillovers.
Following the literature on national innovation systems, we measured knowledge distance using the
number of patents and of scientific articles per capita (Furman et al., 2002; Nelson & Rosenberg, 1993 in
Berry et al 2010).
Both of the variables are highly positive which is not surprising. Especially in the last years the
number of patents really took off. This is in line with our previous findings that discuss the domestic
development of new technology focusing on the New Energy Vehicles.
52
Kristian Vleugels 295123
Thesis MSc ChEB
The positive correlation of the number of cars produced and the increase in the number of
scientific articles also comes as no surprise. The spillover effects of the knowledge development have
been explicit in the automobile industry. Specific examples are the automotive university in ChongChing
just miles away from Ford’s production facility and headquarter, which has established itself as the main
employer of the universities alumni. A similar example is the PhD program at Geely through which they
try to optimally benefit from these spillover effects, improving their own technical capabilities.
5.5 Co-evolutionary Analysis
To explain a change in the Chinese automotive industry as a co-evolutionary process, and
thereby validate the use of co-evolutionary theory in a planned economy, it is necessary to indentify in
more detail how the populations are causally linked to produce the observed outcome. In line with solid
social science research (Tilly, 1998) we identified robust causal processes in the analysis part that
explains how the Chinese automotive industry has developed. To explain the co-evolution of the
automotive industry and technology in the period between 1953 - 2011 we indentified, the change in
technology dependence, a change in economic planning, and increase in supporting industries, the
emergence of enormous market potential, the transfer of technology between foreign and domestic
manufacturers and the shift of technology towards the new energy vehicles as the more specific causal
mechanisms that connected the evolution of the populations. In this analytical picture, the agents in one
population alter the success chances of the agents in a second population. In co-evolution, the path of
one population is significantly influenced by the characteristics of a second population indicating that
co-evolution theory has an explanatory value in the development of the Chinese automotive industry.
Unlike a static theory, it is not necessary in such a dynamic account that a country which at the
end of longer period possesses a large leadership in market share starts out with a significant lead
(Murmann, 2003). Over time relative small differences in market share can amplify and develop into
much larger differences, provided that self reinforcing processes dominate self limiting ones. This is
precisely what happened in the Chinese automotive industry. Because of the potential of the market
share and a surplus of capable laborers due to the reform, combined with the emergence of recent
innovations, manufacturing firms are producing more cars in the Chinese market than in the United
States or Japan. Based on their technology advantage and large domestic market the U.S and Japanese
firms dominated the market for the last centuries. But the institutional developments in China combined
with the increased focus on technological development allowed the Chinese automotive industry to
become more competent in producing cars than the U.S or Japanese industry.
53
Kristian Vleugels 295123
Thesis MSc ChEB
When China’s economy opened up after 25 years of economic malaise there was huge
unemployment in a country with virtually no cars. This institutional turnaround was crucial for the
development of the industry as it is today. In the first place the high level of unemployment allowed for
cheap labor and an abundance of input for the industry. In the second place after thirty year of
development a large middle class has been established in China, all looking to buy a car. In the case of
China the gain in market share became self reinforcing, whereas in the U.S the market share only
reduced. Over the recent decade this led to a dramatic reversal of fortunes of the two national
industries: In the recent years China came to dominate the industry in a way similar to American firm’s
domination of the packaged software industry at the turn of the twenty first century (Murmann, 2003).
A second category of self reinforcing processes is related to the institutional environment of the
firm populations. After the reform China had virtually no technology that was needed in order to
support an automotive industry. The government saw the need for automobiles in order to reform the
economy and refused to import them. Acknowledging the lack of technology they allowed foreign
manufacturers to come to China to produce their cars there. This vital decision allowed for a rapid
development of the automobile industry in China, which became dominated by the foreign-domestic
joint ventures. These developments in turn helped Chinese firms cement their dominance of the world
automotive industry. The fact that these firms were forced to operate under a joint venture structure is
in complete support of Pfeffer and Salancik’s (1978) resource dependence theory of organizations, as
Chinese firms did not shape their selection environment so they would find it hard to expand and face
serious competition from foreign firms. This is why the automotive industry development is largely
founded on foreign firm involvement. Institutional support for the development of NEV’s will likely
cause this to shift towards the domestic manufacturers as they start to develop a superior technology
which will become the main focus of the global automotive industry in the near future.
In the Chinese automotive industry, government policy and the transfer of technology were the
key factors that mattered for the relative success of national populations of firms. At other times
industries, tax laws, employer – employee relations and financial institutions may play a decisive role in
the long term competitive success of firms. We have good reason to believe that co-evolutionary
processes will also shape these latter institutional structures. Of course, it was not the social
environment that invented industrial-scale processes and manufactured cars. Firms played a crucial role
in translating institutional differences into competitive advantages. Among many other things firms had
to take technology from their joint venture and scale them into domestic industrial production.
54
Kristian Vleugels 295123
Thesis MSc ChEB
Besides the traditional theory of co-evolution we can also observe that co-evolution theory also
works in reverse. An interesting way of validating co-evolution theory as it has not yet been done
before. Due to the decreased amount of causalities between the populations we see a decrease in
industry development and even a reverse to some extent in the pre reform period. From this we
inherently can derive that co-evolution theory works both ways.
Overall we can say that the co-evolution theory as presented by Murmann (2003) holds for a
planned economy and can explain the development of the Chine se automobile industry. In order to
extent the existing model of co-evolution we have formulated several conditions in order to make it
better applicable to a planned economy which will be discussed in the discussion part.
Co-evolution is not a
static process
•The US and Japan do not have a significant lead anymore in the
automobile industry due to the rapid co-evolutioanry proces in
China
Co-evolution is self
reinforcing
•High unemployement resulted in cheap labor which resulted in
a competitive position for China
• Governmental control resulted in local manufacturing and
foreign technology transfer improving the Chinese technology
base on which they developed ground breaking NEVs
Co-evolution is resource
dependent
• Firms where not able to create their own selection
environment and where dependent on external resources
Different factors will
drive future co-evolution
•As the industry develops other institutional differences will be
translated in a competitive advantage
Co-evolution is multi
directional
•An increase in causalities spurs industrial development but a
decrease of causalities also decreases the level of industrial
development
Figure 14: Co-evolution analysis visualized
55
Kristian Vleugels 295123
Thesis MSc ChEB
Chapter 6: Discussion
In this chapter we will discuss how we can make it easier for co-evolution theory to explain
events like the changing dynamics in the Chinese automotive industry. We will discuss seven
observations based on expert opinions and historic analyses that help us find pre conditions to coevolution theory in planned economies that Murmann (2003) and others did not find. As observed from
the interviews in combination with the analysis of the causality in the three periods there are various
conditions that are not mentioned by traditional co-evolution theory that need to be included when
observing planned economies.
Market potential has a disproportional influence on the co-evolutionary model
in planned economies5
(1)
Even though the business environment has never been optimal the industry is still skyrocketing
in the last decade ignoring IPR problems, regulations problems, quality problems, just because car
manufacturers see an enormous potential in China’s automobile market. This enormous market
potential has become the counterbalance of the negative factors in the Chinese automotive industry.
Market potential is one of the basic factors for industry development, due to its inherent nature it has
never been highlighted as a pre-condition for co-evolution. We choose to emphasize its importance in
this research because without extensive market potential in planned economies, foreign manufacturers
would not consider working in the difficult institutional environment that is often plagued with property
right concerns and issues alike.
Researchers have not yet reached a consensus if market potential is a pre-condition for industry.
Therefore the observation is in contrast with theories of certain academic researchers especially in
research done by Harris (1954) and Krugman (1998). Harris measured the market access of each county
in the United States using several ad hoc but fairly sensible measures of "market potential": a weighted
sum of purchasing power across locations, with the weight for each location depending inversely on its
distance. He came to an exciting suggestion that the concentration of production was self-reinforcing.
5
Derived from an interview with Mr Schroeter Director of Daimler China
56
Kristian Vleugels 295123
Thesis MSc ChEB
Firms chose to produce in regions with good access to markets; but access to markets tended to be good
in regions in which many firms chose to produce. This theory formed the foundation for Krugman’s
(1998) research in which he argues that the dynamics of the economy can, if one likes, be viewed as the
co-evolution of two landscapes: a landscape of current distribution of economic activity, which
determines a second landscape of market potential, which in turn determines how that first landscape
changes over time. In the Chinese automotive industry we observe the exact opposite; the market
potential determines the landscape of current economic activity. Since the market potential is so high in
China it changes how manufacturers observe the market landscape. Instead of seeing a difficult market
with lots of pitfalls and constraints they see an unraveled land of opportunities. Because of this view on
the market the foreign manufacturers are more willing to enter in joint ventures and share their
technology in order to gain a foothold in the market. It also influences the Industry as the opportunities
stimulate entrepreneurial actions in order to capitalize on these opportunities. Even the formal
institutions change into a more supportive regulatory environment in order for China itself to benefit as
much as possible from the current market conditions. We can conclude from this that market potential
is a pre-condition that needs to be highlighted when applying co-evolution theory to a planned
economy.
The realization of supporting industries has been crucial for the co-evolutionary process6
(2)
China slowly moves away from being solely a manufacturing economy to becoming a service
economy as well. As China no longer depends only on the manufacturing industry the protectionism of
the government becomes much less, allowing for more room for co-evolution to occur as more
causalities and links are established under less tight regulations. This effect is even greater in the
automobile industry as it was dubbed a pillar industry in China and is therefore one of the longest and
most extensively regulated industries in China. Besides the relief of pressure, the establishment of a
solid high end service industry fuels further development of the automotive industry as more causalities
are realized between the (novel) high end service industry and the automotive industry improving the
process of evolution and co-evolution. Not all theory acknowledges that strong national industries often
6
Derived from an interview with Professor Buhui Qiu former strategic analyst of Ford Motor Company
57
Kristian Vleugels 295123
Thesis MSc ChEB
tend to be supported by secondary industries and therefore fuel co-evolution (Porter 1990; Nelson,
1996). Theory established by Lewin and Volberda does underline the importance of supporting
industries. Through this observation we want to integrate these two different streams of the literature
that have not been connected yet, allowing for this observation to function as a pre condition for coevolution to be applied in planned economies.
The formal government regulated institutions are a dominant factor in the
co-evolutionary model
(3)
As observed from the case study co-evolution is nonexistent under a tight centrally planned
economy. The institutional causality is dominating in the planned economy. As seen in the pre reform
phase all the causality relations were one-sided, as it was only the government that influenced the
industry and technology. In a one-sided economy without co-evolution there will be no development. As
a result we also see that the development of the automotive industry during this period completely
stopped. After the reform China allowed for more interchangeable relations to be established between
the formal institutions, technology and the industry and ergo the industry developed. The traditional
theory argues that the influence of institutions is limited to how efficiently they coordinate human
efforts and institutions and they have an influence on the performance of other institutions and/or the
economy (North, 1990 Nelson and Sampat, 2001). When defining the influence of institutions in this
way, it grossly underestimates the weight of formal institutions in co-evolutionary research in planned
economies. A good example of this is the analysis of the causalities in the pre reform period. It boils
down to the fact that the weight of the three populations differ in the western economies and the
planned economies. Where in the Western economies the weights are more or less equally distributed
in the planned economies the formal institutional influence has a much higher weight and should
therefore be accounted for in the preconditions of the co-evolutionary theory when applied to planned
economies.
58
Kristian Vleugels 295123
Thesis MSc ChEB
IPR regulations have a limited influence on the co-evolutionary model
(4)
A precondition that is stated in Murmann’s (2003) theory on co-evolution deals with IPR’s, and
its importance for the development of a successful industry. A steady IPR environment in the respect of
Murmann’s research creates a competitive advantage for firms creating superior capabilities for
manufacturing and marketing product and thus is essential to industry development. In China however
we see a lack of IPR regulations but industry still developments on a rapid pace. This is mainly caused by
the vast potential of the market in China which causes firms to ignore the IPR issue and keep producing
and focusing on the Chinese industry fuelling its development. The theory agrees with this unexpected
situation to certain extend as the effects of changes in one variable frequently contradict inferences
based on simple cause-effect logic of linear relations according to Baum and Singh (1994) and Casti
(1994). So we see that a steady IPR environment is not a pre condition as stated by Murmann but only if
the market potential is large enough to offset the damage due to a lack of IPR’s can be compensated for.
Technology is not a steady evolutionary process7
(5)
The Chinese evolution seems to have skipped a step in development, as China is leap frogging
from a technology absorber on traditional engine and automotive technology to a technology distributer
in the field of NEV’s. This is in line with the standard theory that technological change plays an
important role in industrial dynamics and economic growth (Usher, 1954; Landes 1969; Rosenberg
1982). Even the more radical development is supported by scholars whom argue that technological
innovations not only are able to create new products and industries but also can radically destroy the
fortunes of existing firms or even eliminates entire industries altogether (Schumpeter, 1934; Gort and
Klepper, 1982; Nelson and Winter, 1982; Tushman and Anderson, 1986; Anderson and Tushman, 1990).
But this observation disagrees with many historians of technology that argue that the development of
technology is best understood as an evolutionary process (Basalla, 1998; Vincenti, 1990; Petroski, 1992;
7
Derived from an interview with Professor Grit Walther Researcher in the field of automotive development
59
Kristian Vleugels 295123
Thesis MSc ChEB
Ziman, 2000). The process we see in China is not a straight evolution process but leap frogs through its
development. Besides the leapfrogging another indication that technology is not a standard
evolutionary process in the planned economy is observed. It appears that changes in technology seem
to be a second order effect when it comes to the causalities of co-evolution in a planned economy. In
the context of a planned economy this is not a surprising observation as formal regulations are most
often seen as the determining factor in industry change. In the context of the co-evolutionary theory
this is much more unusual as technology has usually been observed as a first order effect of co-evolution
in for example the dye industry development in Germany (Murmann, 2003). The theory does however
deal to an extend with this second order effect. in Baum and Singh (1994), for example, they make the
distinction between direct co-evolution, in which one population evolves in response to another
population, and diffuse co-evolution, in which one or more populations evolve in response to several
other populations in a broader ecological system. Based on this when looking at co-evolution in a
planned economy we must pay special attention to the indirect influences of technology, avoiding
underestimation of the importance, when compared to industry and institutional influences.
Nonetheless in the context of planned economies a clear precondition should be stated for these
developments in technology.
Co-evolution benefits foreign companies more than local companies8
(6)
The local car industry did not benefit as much from the industry as the foreign companies did.
This observation disagrees with the studies on evolution with in particular with one of the most
prominent, performed by Barnett and Hansen (1996). He reported findings that support dynamic
interactions between firm learning and adaptation on the one hand, and higher levels of competition
and selection on the other. According to this theory after the economic reform in China the domestic
and foreign manufacturers were more likely to compete in a more persistent form of co-evolution
dubbed an “arms race” or “the Red Queen effect” (Beinhocker 1997, Kauffman 1995, Van Valen 1973).
Due to the enormous lag in technology and development of the domestic manufacturers they do not
benefit as much. In order to do so they will need to catch up in technology and development, from there
8
Derived from an interview with Mr Zhao Director at Geely China
60
Kristian Vleugels 295123
Thesis MSc ChEB
on we will see a more persistent form of co-evolution between the domestic and foreign manufacturers.
This observation is more industry specific in China’s automobile industry and is therefore not
determined as a precondition for co-evolution theory in planned economies. It is however an important
observation which is key to the development of the automotive industry in China. When this situation
continues consequences could be an unstable future growth of the industry that depends to heavily on
foreign involvement.
In contrast with other industries, technology transfer in the automotive industry
was a success9
(7)
The co-evolution between technology and industry was not always as difficult as claimed. This
observation disagrees with the theory on the ease of joint ventures in China as explained by Shenkar
(1990), who says that many IJVs in the PRC seem to run into major difficulties. Furthermore this
observation also tarts the relevance of research on firm use of their inter-partner network structure to
overcome knowledge transfer difficulties between foreign and local IJV partners in the Chinese
automotive industry as performed by Zhoa et all (2005). As all interviewed experts and historical
research points out that inter-partner network structure are the root of establishing joint ventures.
Research as done by Zhao argues from the mindset that government regulated joint ventures will
inherently fail and need to be secured by inter partner networks, but in practice this does not seem to
be the case. This observation is also more industry specific to China’s automobile industry and is
therefore not determined as a precondition for co-evolution theory in planned economies. It is however
an important remark which adds to the development of the automotive industry in China, as it implies
that the expensive and frequently redundant constructions to safeguard technology are often not
needed in China’s automotive industry.
From these observations we can establish several preconditions for planned economies
that the Murmann’s (2003) and others did not find, that will help increase the explanatory capabilities of
co-evolution theory in planned economies.
9
Derived from an interview with Professor Buhui Qiu
61
Kristian Vleugels 295123
Thesis MSc ChEB
The first precondition for technology is that it does not necessarily follow a straight path in
development in planned economies as it leap frogs to catch up with the global industry level. The
second pre condition is that technology in planned economies is often observed as an indirect effect
which could lead to the underestimation of the importance of this population.
The first precondition for the formal governing institutions focuses on the above average effect
of the institutional environment in planned economies which must be accounted for. The second pre
condition accounts for the limited influence of supporting institutions like IPR’s in planned economies
which are tightly related to the existent market potential as previously discussed.
The first precondition for the industry is the need for a certain level of market potential to be
present in the industry, the larger the market potential the larger the industry development. It must be
noted that a certain threshold in market potential has to exist in order to overcome industrial distortion
as often observed in planned economies. The second pre-condition is that supporting industries need to
have established themselves, as they are key providers for interaction and causality in planned
economies and relieve pressures of institutional influences on one industry.
When taking these pre conditions into account when studying industry dynamics in planned
economies we find it easier to observe the causalities that matter for the industry dynamics. The
explanation of the changing dynamics in the Chinese automotive business would have been more
detailed if besides the effects of technology and the importance of formal institutions, also the
important effect of market potential on the industry dynamics in planned economies, would have been
emphasized.
62
Kristian Vleugels 295123
Thesis MSc ChEB
Chapter 7: Conclusion
In this thesis we focused on the challenge of developing new insights into the theory of coevolution and increasing the generalizibility of the theory by expanding it for use in planned economies.
More specifically we use the Chinese automotive industry as a case study to find the exceptions of coevolution theory when applied to a planned economy. We combined expert opinions with solid
historical research in order to come up with new additions. Not yet before has an extensive in-depth
case study been preformed that focuses on industry co-evolution in a planned economy. Now we will
look at the conclusions we can draw from the analysis and observations and asses the theoretical and
practical implications as well as providing some suggestions for future research.
7.1 Theoretical Implications
After performing this research we believe that co-evolutionary theory can be applied to industry
development in any context, also within a planned economy, in the same way as scholars believe that
evolution and co-evolution theory can explain many other developments like economic change or the
development of a language (Murmann, 2003; Lewontin, 1974). Under the assumption that the right pre
conditions are set and the theory is applied to the situation correctly. In the analysis part we have
argued that the development of the Chinese automotive industry can be explained with co-evolution
theory after extensive analysis of the causalities within the industry over the past 60 years.
In this research we found pre conditions that others did not find. We visualized this contribution
in figure 14, for an elaborate explanation of this figure I refer to appendix III. The already existing
conditions for co-evolution are depicted by the grey areas whereas the contributions of this research are
visualized by the light blue areas. Whereas all new contributions naturally apply to the planned economy
there are exceptions in the traditional literature that do not explain certain developments in which case
they are accentuated with a red outline.
Besides the pre conditions to the fundamental theory of co-evolution another important
observation in this research adds to the generalizability of co-evolutionary theory in planned economies.
The established notion that co-evolution theory can be applied in reverse e.g. that a decrease in the
amount of causalities observed within an industry will lead to a decrease in industry development,
drastically improves the ease of implementing co-evolution theory to planned economies. As from now
also the lack of causalities that can be observed in strict planned economies, can be used as a starting
point to indicate the industrial development trajectory.
63
Kristian Vleugels 295123
Thesis MSc ChEB
Figure 15: Preconditions related to co-evolution theory in planned economies
Traditional pre
conditions for
co-evolution
Additional pre
conditions for
co-evolution
Populations of
research
Applicable in
planned
economies
Traditional Co-evolution Pre Conditions
Not applicable
in planned
economies
Additional Co-Evolution Pre Conditions
64
Kristian Vleugels 295123
Thesis MSc ChEB
7.2 Practical implications
The practical implications of applying co-evolutionary theory to planned economies in general
and the Chinese automotive industry in particular allows us to say something about the key drivers of
the industry change and possibly also about the future developments in the industry
In the post reform period the changes were gradual and in line with the guidelines set by the
government for the reform of the entire economic and institutional system. This is translated in a
gradual improvement of the automotive industry over these years, mainly driven by policy reforms and
an increase of economic openness over time. Allowing for foreign companies to come in and supply the
market with much needed technology is giving the industry a solid base for future development
The subsequent boom in the industry, that started in 2000 – 2001, was kicked off by the gained
WTO membership of China. The continuation of this fast growth was ensured due to further easing of
the political constraints with regards to operations in China for foreign and domestic companies
including improved regulations surrounding exports and imports. Besides this the development of
knowledge in China played a big role in the boom during the last era. Improvements of the educational
system during the pro reform period allowed for a large amount of highly educated workers to enter the
employment market during the last ten years improving the technological capabilities of firms. Last but
definitely not least is the importance of economic development in China as a whole. This last era has
been a turning point for economic development in China as a whole benefitting the automotive industry
tremendously.
When pointing our eyes to the future we can safely say that the Chinese automotive industry
will remain to develop at a fast pace. Especially as future economic developments are regarded as
positive. At the moment of writing, one of the main drivers of the industrial development is the
continuing growth of the Chinese middle class which will fuel the market potential for cars in China
leveraging the industrial difficulties. In time the formal institutions will develop further and will make
the industrial landscape more facilitating in term regulations and IPR, creating a reduced dependence on
market potential in order to keep China attractive as an automotive market. Furthermore the
developments surrounding the new energy vehicles will give China the competitive advantage they need
in order to become an independent car manufacturing economy.
Considering that every Chinese family would own a fossil fuel powered car, the world supply of
fossil fuel would run out within 25 years. So the further development of the Chinese economy as a
whole depends on the success of the new energy vehicles.
65
Kristian Vleugels 295123
Thesis MSc ChEB
However there is no sun without shadow and hence a word of caution must be included here.
China moved away from being a laggard to being an industrial leader, a growth that took the country
less than thirty years where it took the U.S and Japan over 60 years to develop such an extensive
automobile industry. This rapid development pared with its increased causalities may cause the Chinese
industry to become unstable. Clear signs of this are the leap frogging in technology. Without even
having familiarized with the fundamental technology of traditional petrol engine designs the local
industry is already focusing on even more advanced technology projects in the NEV sector. The effects
of “too much co-evolution” could become an Achilles heel for the Chinese automotive industry. Without
familiarizing itself with the traditional technologies the future industrial growth could be founded on a
poor foundation of knowledge. In line with this unstable growth is the dependence on foreign
companies for these fundamental technologies that causes local companies to benefit less from
industrial development than foreign manufacturers. Besides this there is a looming demographics issue
in China which could distort the market attractiveness due to the aging of the population. The effects of
the aging population will not be felt in the short term but could become a serious problem for China’s
development, not only in the automobile industry.
7.3 Limitations and suggestions for further research
There are several limitations to this research one of them is the focus on the automotive
industry. In order to create a better understanding on how to apply co-evolutionary theory to planned
economies similar research needs to be performed on multiple industries in planned economies.
Furthermore the focus on China as benchmark for the planned economy provides an enormously
interesting base but more insights into the applicability of co-evolutionary theory can be found when
looking at stricter planned economies like North Korea, which would however be much more difficult to
research when it comes to gathering data. Besides the geographical issues also a closer look at the firm
level co-evolution in China can provide a more detailed insight in the workings of co-evolution. The firm
level performance development over time in planned economies would be interesting to analyse to
establish a wider theoretical background on co-evolution in planned economies.
66
Kristian Vleugels 295123
Thesis MSc ChEB
Appendix I – Overview cars produced in China
Appendix II - Graphical Development of the Dimensions
Automotive Development
67
Kristian Vleugels 295123
Thesis MSc ChEB
Economic Development
68
Kristian Vleugels 295123
Thesis MSc ChEB
Political Development
69
Kristian Vleugels 295123
Thesis MSc ChEB
Demographic Development
70
Kristian Vleugels 295123
Thesis MSc ChEB
Political Development
71
Kristian Vleugels 295123
Thesis MSc ChEB
72
Kristian Vleugels 295123
Thesis MSc ChEB
Appendix III– Analysis of pre conditions old and new
Where traditional co-evolution theory explained what happened in the Chinese automotive industry

Interaction

Non linear

Non path dependent

Multiple levels

Increased competition

Historical context

Long time period
Where traditional co-evolution did not explain what happened in the Chinese automotive industry

Creates and destroys industry’s

Evolutionary processes

Political macro variables

Different institutional systems
Where additional pre conditions are needed in planned economies that Murmann and other did not
find

Radical evolution of technology

Indirect effect of technology

Above average influence

Effect of supporting industries

Limited effect of supporting industries

Market potential

Horizontal supporting industries
73
Kristian Vleugels 295123
Thesis MSc ChEB
References
 Aldrich, H. E. (1979). Organizations and Environments. Prentice-Hall, Englewood Cliffs, NJ.
 Amsden, A. (2001). The rise of “the rest:” Challenges to the West from late-industrializing economies.
(First Edition). New York: Oxford University Press
 Anderson, P. (1999). Complexity theory and organization science. Organ. Sci. 10(3) 216–232.
 Anderson, P Tushman, M (1990) Technological Discontinuities and dominant design: A cyclical model
of technological change. Administrative Science Quarterly 35: 604-33
 Baden-Fuller, C., J. M. Stopford. (1999). Rejuvenating the Mature Business: The Competitive
Challenge. Routledge, NY.
 Barnett, W. P., R. A. Burgelman. (1996). Evolutionary perspectives on strategy. Strategic
Management J. 17(Summer) 5–19.
 Barnett, P Hansen M (1996) The Red queen in organizational evolution. Strategic Management
Journal 17 : 139-57
 Baum, J. A. C. (1999). Whole-part coevolutionary competition in organizations. J. A. C. Baum, B.
McKelvey, eds. Variations in Organization Science: In Honor of Donald T. Campbell. Sage, London. 7
113–135.
 Baum, J. A. C J. V. Singh. (1994). Evolutionary Dynamics of Organizations. Oxford University Press,
NY
 Bassala, G (1988). The evolution of Technology. New York: Cambridge University Press
 Beinhocker, E. (1997). Strategy at the edge of chaos. McKinsey Quart. (1) 25–39.
 Berry, H. Guillen, F. Zhou, N (2010). An institutional approach to cross-national distance. Journal of
International Business Studies (2010) 41, 1460–1480
74
Kristian Vleugels 295123
Thesis MSc ChEB
 Burgelman, R. A (1994). Fading memories: A process theory of strategic business exit in dynamic
environments. Admin. Sci. Quart. 39(1) 24–56.
 Burgelman, R. A (1996). A process model of strategic business exit: Implications for an evolutionary
perspective on strategy. Strategic Management J. 17(Supp., Evolutionary Perspectives on Strategy)
193– 214.
 Calori, R., M. Lubatkin, P. Very, J. F. Veiga. (1997). Modelling the origins of nationally bound
administrative heritages: A historical institutional analysis of French and British firms. Organ. Sci.
8(6) 681–696.
 CATARC (China Association of Automobile Manufacturers & China Automotive Research and
Technology Center). (2002). Automotive industry of China 2002. Tianjin: China Automotive Research
and Technology Center.
 Carroll, L. (1946). Through the Looking Glass & What Alice Found There. New York: Grosset &
Dunlap.
 Carley, K. M. (1995). Computational and mathematical organization theory: Perspective and
directions. Comput. Math. Organ. Theory 1(1) 39–56.
 Casti, J. (1994). Complexification: Explaining a Paradoxical World through the Science of Surprise.
HarperCollins, New York.
 Chandler, A. D. (1962). Strategy and Structure: Chapters in the History of the American Industrial
Enterprise. MIT Press, Cambridge, MA.
 Chang’An Automobile (Group). (2002). Chang’An Automobile (Group) Liability Co. Ltd. company
report. Chongqing, China.
 Cohen, J., I. Stewart.( 1994). The Collapse of Chaos: Discovering Simplicity in a Complex World.
Viking, New York
75
Kristian Vleugels 295123
Thesis MSc ChEB
 Davis, S.C. and Diegel, S.W. (2002). Transportation energy databook (No. ORNL-6967). Washington,
DC: Oak Ridge National Laboratory, Center for Transportation Analysis, U.S. Department of Energy.
 D’Aveni, R. A., R. E. Gunther. (1994). Hypercompetition: Managing theDynamics of Strategic
Maneuvering. The Free Press, New York.
 Dongsheng, G and Fujimoto, T (2004), Quasi-open Product Architecture and Technological Lock-in:
An Exploratory Study on the Chinese Motorcycle Industry, Annals of Business Administrative Science,
April, Vol. 3, No. 2.
 East Asian Executive Reports (1994), ‘China: automotive industry industrial policy’, 16(9)
 Fairbank, J.K. (1951). The United States and China (Third Printing, First Edition). Cambridge, MA:
Harvard University Press.
 Furman, J. L., Porter, M. E., & Stern, S. 2002. The determinantsof national innovative capacity.
Research Policy, 31(6): 899–933
 Garud, R., A. H. Van de Ven. (1992). An empirical evaluation of the internal corporate venturing
process. Strategic Management J. 13 93–109.
 Gallanger. K (2006) Foreign technology in China’s Automobile insutry: Implications for Energy,
Economic Development, and Environment, China environment series, Issue 6
 Gort, M Klepper, S (1982). Time paths in the diffusion of product innovations. Economic Journal 92
(367): 630-61
 Goodman, D. (2004) China's Campaign to "Open Up the West": National, Provincial and Local
Perspectives, Cambridge University Press, pp. 317-334
 Halberstam, D. (1986). The reckoning. New York: Avon Books.
 Harris, C.D (1954) The market as a factor in the localization of production, Annals of the Association
of American Geographers 1954, 44, 315-348.
76
Kristian Vleugels 295123
Thesis MSc ChEB
 Harwit, E. (1995). China’s automobile industry: Policies, problems, and prospects. New York, London:
ME Sharpe.
 Hannan, M Freeman, J (1984). Structural inertia and organizational change. American Sociological
Review 49: 149-64
 Henderson, R., W. Mitchell. (1997). The interactions of organizational and competitive influences on
strategy and performance. Strategic Management J. 18(Summer Special Issue) 5–14.
 Henisz, W. J. (2000). The institutional environment for economic growth. Economics and Politics,
12(1): 1–31.
 Henisz, W. J., & Williamson, O. E. (1999). Comparative economic organization – Within and between
countries. Business and Politics, 1(3): 261–277.
 Heylighen, F., D. T. Campbell. (1995). Selection of organization at the social level: Obstacles and
facilitators of metasystem transitions. World Futures: J. General Evolution (Special Issue) 181–212.
 Huang, Y. (2002, October). Analysis on rules and trends in the revision of Chinese industrial policies
related to auto industry. Paper presented at the Joint Workshop on Cleaner Vehicle Development
and Deployment, Beijing.
 Huber, G. P. A. H. Van de Ven. (1995). Longitudinal Field Research Methods: Studying Processes of
Organizational Change. Sage, Thousand Oaks, CA.
 Huygens, M. (1999). Co-evolution of capabilities and competition: A study of the music industry.
Rotterdam, PhD Series in General Management, Rotterdam School of Management (33). Rotterdam,
The Netherlands.
 Hunter, S. D. (1999). Information technology and organization structure. Unpublished dissertation,
Duke University, Durham, NC.
 Holland, J. H. (1999). Emergence: From Chaos to Order. Addison-Wesley Reading.
77
Kristian Vleugels 295123
Thesis MSc ChEB
 Ingram, P., P. W. Roberts. (1999). Suborganizational evolution in the U.S. pharmaceutical industry. J.
A. C. Baum, B. McKelvey, eds. Variations in Organization Science: In Honor of Donald T. Campbell.
Sage, London.
 Ilinitch, A. Y., A. Y. Lewin, R. A. D’Aveni. (1998). Managing in Times of Disorder: Hypercompetitive
Organizational Responses. Sage, Thousand Oaks, CA.
 Kauffman, S. A. (1993). The Origins of Order: Self-organization and Selection in Evolution. Oxford
University Press, New York
 Kauffman, S (1995). Technology and evolution: Escaping the Red Queen effect. McKinsey Quart.
1995(1) 118–129.
 Kieser, A. (1989). Organizational, institutional, and societal evolution: Medieval craft guilds and the
genesis of formal organizations. Admin. Sci. Quart. 34(4) 540–564
 Krugman, P ( 1991). Geography and trade. Cambridge, MA: MIT press
 Landes D (1969) Theunbound Prometheus: Technological Change and Industrial Development in
Western Europe between 1750 to the present . new York: Cambridge University Press
 Lawless, M. W., A. Y. Lewin, J. Kim. (1999). Evolution of alliances in increasingly turbulent
environments: U.S. telecommunications, (1986–1998). Strategic Management Society, 19th Annual
International Conference, Berlin, Germany
 Lee, C. Chen, J. Fujimoto, T. (1995) Different Strategies of Localization in the Chinese Auto Industry:
The Cases of Shanghai Volkswagen and Tianjin Daihatsu, Working Paper for the MIT 1996 IMVP
Sponsors Meeting Sao Paulo, Brazil
 Levitt, B., J. G. March. (1988). Organizational learning. W. R. Scott, ed. Annual Review of Sociology.
14 Annual Reviews, Palo Alto, CA. 319–340.
78
Kristian Vleugels 295123
Thesis MSc ChEB
 Levinthal, D Myatt, J (1995) Coevolution of capabilities and insutry: The evolution of mutual fund
processing. Strategic Management Journal 15: 45-62
 Levinthal, D. A. (1997). Adaptation on rugged landscapes. Management Sci. 43(7) 934–950.
 Lewin. A, Volberda. H (1999) Prolegomena on Coevolution: A framework for Research on Strategy
and New organizational forms,Organization Science, Vol. 10, No. 5, September–October 1999, pp.
519–534
 Lewin, A. Y. C. Weigelt. (1999). Co-Evolution of the U.S. Commercial Banking Industry: A Longitudinal
Analysis of Mergers As a Strategy of Wealth Creation (1982–1997). Annual Meeting of the Academy
of Management, August 6–11, Chicago. March, J. G. 1991. Exploration and exploitation in
organizational learning. Organ. Sci. 2(1) 71–87.
 Lewontin, Richard C. (1974). The Genetic basis of evolutionairy change. New York: Columbia
University press.
 Luo, Qiuliang. (2002). “Chinese and foreign businesses compete for China’s auto parts market,”
China
Economic
News,
Series
1154,
No.
4.
[On-Line].
Available:
http://
www.eiahk.com/cenartic_154.htm
 McKelvey, B. (1997). Quasi-natural organization science. Organ. Sci.8(4) 352–380.
 Miller, D. P. H. Friesen.( 1982). The longitudinal analysis of organizations.Management Sci. 28(9).
 Murray, G (1994) Doing Business in China: The last Great Market, CHINA LIBRARY Publishing, Print
1994
 Murmann, J Tushman, M (2001) From the technology cycle to the entrepreneurship dynamic: The
social context of entrepreneurial innovation. In the Entreprenurial Dynamic: Origins of
entrepreneurship and Its Role in Indusrty Evolution. Palo Alto, CA: Stanford Umiversity press, pp
178-206
79
Kristian Vleugels 295123
Thesis MSc ChEB
 Murmann, J (2003) Knowledge and Competitive Advantage : The coevolution of firms, technology
and national institutions, Cambridge University press, Reprint 2007
 Nelson, R (1995) Co Evolution of industry structure, technology and supporting institutions and the
making od comparative advantage. International Journal of the Economic os Business 2(2) : 171-84
 Nelson , R (1996) The evolution of competitive and comparative advantage: A preliminary report on
a study. Industrial and Corporate Change 5(2): 597-618
 Nelson, R. R., & Rosenberg, N. (1993). Technical innovation and national systems. In R. R. Nelson
(Ed.), National innovationsystems: 3–21. New York: Oxford University Press.
 Nelson, R Sampat, B ( 2001) Making sense of sintitutioons as a factor shaping economic
performance. Journal of Economic “Behavior and Organization 44(I): 31-54
 Nelson , R Winter, S (1982) An evolutionairy Theory of Economic Change. Cambridge MA: The
Belknap Press Harvard University Press
 Nitecki, m (1983) Coevolution, Chicago: University of Chicago Press
 North, D (1990) Institutions, Institutional Change, and Economic Performance. New York Cambridge
University Press.
 Obel, B., B. Eriksen, M. Sondergaard, B. G. Sorensen. (1999). Coevolution and organizational
consequences of mergers in Danish financial services industry 1985–1996. Annual Meeting of the
Academy of Management, August 6–11, Chicago.
 Petroski, H (1992). The evolution of Usefull Things. New York. Alfred Knopf
 Pettigrew, A. (1995). Examining change in the long-term context of culture and politics. J. M.
Pennings and Associates, eds. Organizational Strategy and Change. Jossey-Bass, San Francisco. 269–
318
 Porter, M (1990) Competitive Advantage of Nations, New York: Free Press
80
Kristian Vleugels 295123
Thesis MSc ChEB
 Rosenkopf, L., A. Nerkar. (1999). On the complexity of technological evolution: Exploring coevolution
within and across hierarchical levels in optical disc technology. J. A. C. Baum, B. McKelvey, eds.
Variations in Organization Science: In Honor of Donald T. Campbell. Sage, London.
 Rosenberg, N (1982). Inside the Blavk box. New York: Cambridhe University Press.
 Sanderson, S. W., M. Uzumeri. (1997). Managing Product Families. Irwin, Chicago.
 Schumpeter, J (1934) The Theory of Economic Development. Cambridge MA Harvard University
Press
 Shapiro, J. (2001). Mao’s war against nature: Politics and the environment in revolutionary China.
New York: Cambridge University Press.
 Stinchcombe (2000) Review of organizations Evolving by Howard Aldrich Evolutionairy Theories in
Social Science.
 Stinchcombe, A. L. (1965). Organizations and social structure. J. G. March, ed. Handbook of
Organizations. Rand McNally, Chicago. 142–193.
 Tilly, C (1998) Durable inequality. Berkely, CA: University of California Press.
 Tushman, M Anderson, P (1986). Technological discontinuities and organizational environments,
Administrative Science Quarterly 31: 439-65
 Tushman, M. L. Rosenkopf. (1996). Executive succession, strategic reorientation and performance
growth: A longitudinal study in the U.S. cement industry. Management Sci. 42(7) 939–953.
 Usher, A (1954). history of Mechanical Invention. Cambridg, MA: Harvard University Press
 Utikal, H., O. Schliebusch, L. Theuvsen. (1999). From hierarchy to market: Co-evolution of new forms
of organizing in the German automotive and chemical industry. Annual Meeting of the Academy of
Management, August 6–11, Chicago.
81
Kristian Vleugels 295123
Thesis MSc ChEB
 Van den Bosch, F., H. Volberda, M. de Boer. (1999). Coevolution of firm absorptive capacity and
knowledge environment: Organizational forms and combinative capabilities. Organ. Sci. 10(5).
 Van de Ven, A. H., D. N. Grazman. (1999). Evolution in a nested hierarchy. A genealogy of twin cities
health care organizations, 1853– 1995. J. A. C. Baum, B. McKelvey, eds. Variations in Organization
Science: In Honor of Donald T. Campbell. Sage, London
 Van Valen, L. (1973). A new evolutionary law. Evolutionary Theory 1 1–30.
 Vincenti, W ( 1990). What engineers know and how they know it. Baltimore: Johns Hoplins
University Press.
 Webb, D., A. Pettigrew. (1999). The temporal development of strategy: Patterns in the U.K.
insurance industry. Organ. Sci. 10(5).
 Weber, M. (1978). Economy and Society: An Outline of Interpretive Sociology. Translated by G. Roth
and C. Wittich. University of California Press, Berkeley.
 Wei, L. Chao, A. (1982). China’s economic reforms. University of Pennsylvania Press, Print 1982
 Weick, K. E. (1979). The Social Psychology of Organizing. Addison- Wesley, Reading, MA.
 Whitley, R. (1992). Business systems in East Asia: Firms, markets and societies. London: Sage
Publications.
 Zhang, J. (2002, April). Review and prospect of China auto industry. Paper presented at the Joint
Workshop on Cleaner Vehicle Development and Deployment, Harvard University
 Ziman, J (2000) Technological Innovation as an Evolutionairy Process. Cambridge: Cambridge
University Press
82
Kristian Vleugels 295123
Thesis MSc ChEB